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The risks associated with having co-guarantors

Gateley Legal

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A forged signature of a guarantor can render a personal guarantee given by four individuals unenforceable against all of them, as ruled by the Court of Appeal.  

Will this decision create further hoops for funders to jump through to ensure that guarantees are valid and binding?

In Harvey v Dunbar Assets plc, Mr Harvey, together with three other individuals, entered into a joint and several personal guarantee, capped at £720,000, as security for a £3,500,000 loan facility. Joint and several liability (as opposed to several liability) means that a funder can sue any of the guarantors for the full amount under the guarantee and it would then be for that guarantor to bring a claim against the other guarantors for their proportion of the debt so that they all contributed fairly. Dunbar Assets plc tried to enforce the guarantee and served a statutory demand for £720,000 plus interest on each of the guarantors. Mr Harvey applied to have the statutory demand set aside on the basis that one of the co-guarantors claimed that he had not signed the guarantee and that, in fact, his signature was forged. In the initial case, the judge had held that the failure to take security from one of the proposed guarantors did not discharge, impair or effect the obligations of the others. Mr Harvey appealed this decision.

The Court of Appeal, in reaching its decision, commented that this case was a question of construction and that it would need to look at the individual facts of the matter. The guarantee in question, together with the underlying facility letter, would be taken into account when deciding upon the validity of the guarantee.

One for all…

The starting point for the Court was that if the guarantee was intended to be a joint and several composite guarantee, contained in a single document, which assumed that it would be signed by all of the named guarantors then, on the face of it, the guarantee would be presumed to be subject to the condition that all signatories had executed the document validly. In other words, unless the guarantee stated otherwise, if one guarantor failed to sign, the guarantee would be unenforceable against all the guarantors. The Court held that in this case the guarantee contained no explicit or implicit terms to disapply this presumption resulting in the Court overruling the original decision and the statutory demand against Mr Harvey being set aside.

How to minimise the risk

It is becoming increasingly common to include standard wording in guarantees which expressly provides that a guarantor is bound even if another of the proposed guarantors did not sign the guarantee or did not do so validly. This type of clause is included to displace the presumption that a joint and several composite guarantee is not validly entered into until all signatories have signed. It is important to ensure that composite guarantees contain provisions so that any issue with one guarantor – not only in case of failure to sign (due to an oversight or, as in this case, forgery) but also in case of any other issue that could affect the liability of a guarantor, such as death or incapacity – does not affect the liability of the others. To take the issue further, it can also be useful for the guarantee to make explicitly clear that the lender can deal with any one guarantor (including releasing it from liability) without affecting the liability of others.

This is a stark reminder that we need to take care when dealing with guarantees and must ensure that the processes that have evolved over the years, such as ensuring that the guarantors obtain independent legal advice for personal guarantees, are followed correctly and that the drafting of the document is sufficiently unambiguous.

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