Sometimes loans made to companies do come with the stipulation that the directors of the company provide a personal guarantee for the sum outstanding to the lender in the event that the company is unable to repay the loan.
When a company was placed into administration in 2016, with considerable losses anticipated an investor who had lent the company $2 million presented a statutory demand against the director who had given a personal guarantee. The director applied to set aside that statutory demand.
Unusually, the director did not dispute the validity of the guarantee itself. His argument was that it should not be enforced. The first reason was that he claimed the lender had, in effect, acted in bad faith and in a way that contributed to the failure of the company. It was alleged that, by persuading the investors not to pursue a restructuring of the company's finances but instead forcing it into administration, he had helped to precipitate the default. This was evidenced by emails exchanged between the lender, the company and its backers in the period before it went into administration. It was argued that the restructuring was a 'fairly available alternative' to administration. After trading in administration for a short period the company was sold to a new company owned by former investors, including the lender who had the personal guarantee.
The second argument was similar, and was that the lender had, by bringing about the administration, participated in an 'unlawful means conspiracy' against the company, leaving the lender liable for damages to the company and thereby to the director as guarantor of the loan.
The decision of the High Court turned on the conclusion that the administration of the company was a reasonable action to take and the lender's actions were not the pivotal factor in that decision being taken. Therefore in this instance the lender’s actions were not criticised and the application to set aside the statutory demand was dismissed.
For advice on any insolvency matter or your legal rights and responsibilities as a director, contact Leanne Schneider-Rose on 0121 698 2200 or by email l.schneider-rose@sydneymitchell.co.uk. Taking advice at an early stage where your company is or might be insolvent, in particular where you have given personal guarantees, can often make all the difference and save incurring substantial legal costs in the long term.
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