Are guarantees worth the
paper they’re written on, asks Greg Standing.
Go deeper with GlobalData
Leases of
equipment to companies will often be backed up by a personal
guarantee from a director to provide the lessor with some comfort
should the company default on its obligations. However, a guarantee
may be set aside by the court if it was procured by
misrepresentation or undue influence of the guarantor.
The nature of some
relationships, such as husband and wife, gives rise to a
presumption of undue influence, but undue influence can also arise
in other situations.
In The Trustees of
Beardsley Theobalds Retirement Benefit Scheme v Yardley, the
defendant guaranteed the rent and other obligations of a company
under a 15-year lease.
The defendant’s job title was
‘sales director’. He was not a board director, although the
claimant was told that he was, as the claimant required the
guarantee to be given by a director. He had often witnessed
documents for the directors of the company, and when he was asked
to sign the document he thought he was simply doing so as a
witness. There was nothing on the one page of the document he was
shown to indicate the document was a lease or that he was signing
as a guarantor. At no point was he told he was doing so.
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By GlobalDataThe company went into
administration and the claimant called upon the guarantee. The
defendant claimed he had signed the guarantee under the undue
influence and misrepresentations of the company’s director and that
he had not been given the opportunity to take legal
advice.
The court found that the
company was in financial difficulties and the director knew how
risky it would be to be a guarantor. The director also knew he
could pass the defendant off as a director given his job title. He
had also misrepresented to the defendant what he was
signing.
The court accepted that the
defendant had signed the document under the undue influence of the
director who was in a position of superiority to him and whom he
trusted. The defendant should have had the opportunity to make an
informed decision about what he was signing, and the risks
involved, or take legal advice upon it.
Despite misrepresentations
also having been made to the claimant, it would be untenable to
allow the claimant to rely on the guarantee. It was aware of the
company’s precarious financial position and should have checked
that the guarantor was financially sound. It should have asked the
defendant to confirm in writing that he agreed to be a guarantor
and knew of the risks.
It should also have sought a
signed confirmation from an independent solicitor that the
defendant had received appropriate legal advice before signing or
had waived the need to obtain such advice. A search of the relevant
register at Companies House would also have shown the defendant was
not a director.
Things to
consider
Lessors should be alert to
these issues when obtaining a guarantee from an
individual.
Confirmation that independent
legal advice has been taken on the transaction should be obtained
to avoid the lessor being fixed with constructive knowledge of any
undue influence.
Greg Standing is a
partner in Wragge & Co’s finance litigation
team
