Cross all t’s, dot all i’s: Per­son­al guar­an­tees gone wrong

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.