Guarantors – does the security actually cover your liability?

The Court of Appeal recently held that a personal guarantee was enforceable, even though the guarantor argued that the lender had failed to protect the security that was supposed to cover the liability and avoid the guarantee ever being called upon.

In this case, a holding company (the lender) loaned money to a telecommunications company (the borrower) for which a director provided a personal guarantee (the guarantor).  Re-payment of the loan was secured by a pledge of shares and charge over assets in a subsidiary of the borrowing company, which later went into administration.  When the borrower defaulted on re-payment of the loan, the lender brought proceedings against the borrower and the guarantor and succeeded.

On appeal, the borrower and guarantor argued that the lender had failed to take steps to protect the security in the administration and that, as a direct result, neither had any liability to re-pay the loan to the lender.

The Court of Appeal considered established law that, where a lender fails to look after any security in place, this can discharge a guarantor from any liability.  However, the Court held that a lender could not be expected to incur large costs or expose itself to any significant risk in order to preserve or maintain security. The Court also noted in this case that no real explanation had been provided by the borrower/guarantor as to what steps they believed the lender ought to have taken to protect the security in the circumstances. Accordingly, on balance, the appeal was dismissed.

Matthew Howat, Commercial & Dispute Partner, comments:

Taking a guarantee is common place for many lenders, but one which is surprisingly easy to get caught on, if wrong assumptions are made.  The Courts have traditionally been very protective of guarantors, and many events will reduce or release a guarantor’s liability, unless the express terms of the guarantee provides otherwise.  In this case, the guarantor relied heavily on the security and, when the security failed to materialise, he was not able to persuade the Judge that (a) the lender had failed to adequately protect the security; and (b) the guarantor should therefore be released from his liability under the guarantee.  This serves as a useful reminder to avoid assumptions, check the express terms of a guarantee and stay on top of the underlying liability and the security in place to cover that liability.

Case Reference: General Mediterranean Holding SA SPF v Qucomhaps Holdings Ltd & Ors [2018] EWCA Civ 2416

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