The insolvency of one of the companies within a contractual chain can cause major difficulties for all concerned. However, as one High Court case showed, professional drafting of agreements can provide invaluable protection against such risks.
A large contractor had employed a building and civil engineering subcontractor company to work on nine major construction projects. Their business relationship was close and inter-dependent and, when the subcontractor company fell into financial difficulties, the contractor sought to assist by making advance payments totalling £4 million. The subcontractor company nevertheless entered administration.
The advance payment (in the sum of £4million) was made under an agreement whereby the Director and Shareholder of the subcontractor company guaranteed repayment of the advance. The contractor commenced proceedings against the Director to enforce the guarantee, but the Director argued that the primary obligation to repay the money rested on the subcontractor company and that he only had a secondary obligation to repay the money.
In rejecting that argument, the Court found that, on a true reading of the agreement, the guarantee took effect as an irrevocable and unconditional indemnity. The Director had taken on a primary obligation to repay the entire sum and became liable to do so immediately when the subcontractor company became insolvent. Summary judgment was entered against the Director.
For help and advice in respect of Guarantees please contact Leanne Schneider-Rose on 0121 698 2200
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