Learning the hard way - how to enforce guarantees
Source: Chartered Banker, August / September 2010
A recent Court of Session case in Scotland illustrates the issues that can arise with the enforcement of guarantees. The case (Maureen McLaughlin v Anglo Irish Bank, 26 March 2010) considered whether or not the completion of a certificate of indebtedness should be a precondition to summary diligence against a guarantor.
Park Circus Homes (Glasgow) Limited was provided with banking facilities by Anglo Irish. Joint and several personal guarantees securing the finance to the company were provided, subject to a cap of £2 million. The company began to suffer financially, a demand for repayment was issued and when none was forthcoming, the company was placed into administration.
The personal guarantee granted by Maureen McLaughlin was registerable for preservation and execution. This meant that the guarantee could be enforced by summary diligence and allow a document of debt – in this case, the guarantee – to be treated as the equivalent of a Court decree so that the costs and delay of suing for a debt could be avoided, and the creditor can proceed straight to enforcement.
Following registration of the guarantee, the bank issued a letter demanding repayment of the full £2 million plus costs and interest, which expired without payment. The bank proceeded to serve a charge for payment to establish insolvency, and proceeded to lodge a petition for sequestration.
The guarantor (Maureen McLaughlin) raised proceedings in the Court of Session for suspension of the charge and interdict against sequestration. At that hearing, the Guarantor’s petition was dismissed, but she appealed the decision. The issue revolved around the failure of the bank to provide a certificate of indebtedness when registering the guarantee for preservation and execution. It is common to find a provision in guarantees that a certificate of indebtedness signed by the bank is sufficient to ascertain the debt and put the matter beyond doubt.
The guarantor argued that such a certificate was a precondition to enforcement, whilst the bank argued that the demand letter setting out the sum due was sufficient. The Court found that no general rule applied but that matters turned on the wording of the guarantee as to whether or not a certificate ascertaining the sum due was necessary. All that was required, it found, was a written demand, and that the certificate was intended to deal with the situation where, on receipt of a demand, the guarantor disputes the amount due.
The Guarantor alleged that, at a meeting, the Bank had advised that if the company went into administration, the guarantee would not be called up. The bdisputed this, but nevertheless cited a clause in the guarantee which provided that the guarantor contracts out of any waiver by the bank. The guarantor argued that the meeting constituted a variation of the contract, but the Court found that this would have had to be in writing. However, the Court was not of the view that the no-waiver clause was a complete answer to the issue, and fixed a proof before answer on the issues of waiver and of personal bar.
While the case assists in determining that, in most cases, a certificate of indebtedness is not a pre-requisite to the enforcement of a guarantee, it is a reminder that the specific wording of the guarantee should be checked in each case to avoid any prospect of an expensive oversight. It's also a reminder to be careful when dealing with guarantors on the insolvency of the principal, and not to give any kind of assurance about the enforcement or otherwise of guarantees.
AUTHOR: ALEX INNES
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