It is commonly the case that personal guarantees are required from company directors as a condition of the supply of credit facilities to their companies. Lenders will of course also seek security over a company’s own assets at the same time, but in the event of non-payment or some other event of default by the company, a personal guarantee gives a lender the opportunity to seek repayment out of a director’s personal assets.
A popular method of enforcing personal guarantees is to serve a statutory demand upon the guarantor. Statutory demands bring with them the threat of bankruptcy proceedings and can be a quick and effective method of securing payment of undisputed debts. However, under the applicable Court rules one method of defeating a statutory demand is for the guarantor to establish that the lender holds security for the debt claimed. In situations where a lender holds valuable security over a company’s assets but seeks to enforce a personal guarantee given by a director by serving a statutory demand, guarantors are often tempted to argue that the existence of security over the company’s assets renders the statutory demand unenforceable.
The Court of Appeal examined the interplay between enforcement of personal guarantees and security held over the principal debtor’s assets in White v Davenham Trust Limited. In that case Mr White underwrote the debts of a company (“SGPS”) of which he was a director by giving a personal guarantee to Davenham. SGPS fell into difficulty and Davenham served a statutory demand upon Mr White for the full amount of the debt (which was just short of £1m). Davenham had the benefit of a charge over property owned by SGPS and Mr White challenged the service of a statutory demand upon him by reference to the existence of that security.
The Court stated in no uncertain terms that:
As a result of the above the statutory demand served by Davenham to enforce the guarantee given by Mr White was allowed to proceed, even though Davenham could have sought repayment from selling assets belonging to SGPS.
By the decision in Davenham the Court of Appeal has confirmed that it is only security provided by the guarantor which is relevant when considering if a statutory demand should be set aside because the creditor holds some security. If a creditor holds security from a third party in these circumstances, the existence of that form of security is irrelevant.
The important lesson for company directors who give personal guarantees is that it is unwise to assume that if a principle debtor is in default a creditor will realise any security it holds over the principle debtor’s assets before seeking to enforce a personal guarantee. If the creditor serves a statutory demand to enforce a personal guarantee then the existence of security given by the principal debtor will give no protection to the guarantor whatsoever.
If you would like any further information about the issues raised in this article please contact Nigel Adams (firstname.lastname@example.org), or any other member of Goodman Derrick LLP’s Dispute Resolution team on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
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