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A case to help lenders – guaranteed!

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11/01/2016

The High Court has upheld a lower court’s decision to award summary judgment for a bank on its claim for payment of monies due under a guarantee. The guarantee was signed by the defendant personally for one of his companies. The case, Barclays Bank v Sutton [1], will be of interest to lenders looking to enforce personal guarantees following the failure of a company.

Legal and factual background

The defendant (Mr Sutton) traded for a number of years in expensive motor vehicles. He operated two companies, ‘CSF’ and ‘PSL’. CSF had a poor trading year for a number of reasons and operated an overdraft with the claimant bank (the Bank) in the sum of £250,000. The overdraft was supported by a personal guarantee provided by Mr Sutton. Mr Sutton then decided that he wanted to wind up CSF and to continue trading with PSL instead.

At a meeting between the parties it was agreed that the overdraft would be transferred from CSF to PSL, subject to certain conditions. An email from the Bank, following the meeting, confirmed provision from the Bank to Mr Sutton of a personal guarantee in the sum of £250,000 in respect of the liabilities of PSL, a charge over Mr Sutton’s property to secure the guarantee and provision from PSL to the Bank of a debenture. The guarantee contained a term that Mr Sutton would be bound by the guarantee even if “other arrangements to secure Customer liabilities are never actually put in place”. The Bank also stated that, from 2012, it would be “looking to convert the overdraft to an on demand term loan being repaid over a maximum 4 year term”.

Guarantee claim

Although the personal guarantee was provided by Mr Sutton, the other aspects of the security were never actually complied with and, in particular, he never executed a legal charge against his property. No further action was taken in relation to the proposed transaction for some time. The debts of CSF continued to grow and, by February 2013, the overdraft had reached £266,665. At this time, and without any formality, the Bank transferred the overdraft to PSL, giving that company indebtedness of – £266,665. Mr Sutton argued that this transfer without warning placed PSL into cash flow difficulty. Shortly afterwards PSL stopped trading. The Bank demanded sums due under the guarantee from the Mr Sutton.

Defence

Mr Sutton argued that the guarantee could not be relied upon in isolation, on the basis that it was subject to a collateral contract or warranty that the overdraft would be converted by the Bank into a term loan. Mr Sutton argued that it was not the enforceability of the guarantee which was in dispute in these proceedings, but whether there was any debt owed by PFL to the Bank to which the guarantee could attach. Mr Sutton also counterclaimed for the alleged losses incurred by PFL as a result of the unexpected saddling of its accounts with the transferred overdraft debt.

Decision

The High Court concluded that Mr Sutton had no real prospect of successfully defending the claim. The transfer of the overdraft from CSF to PSL was subject to the Bank being satisfied on the security provided. Upon receipt of the guarantee, the Bank was willing to transfer the overdraft, despite Mr Sutton never having provided the remainder of the security requested. In addition, the specific terms of the guarantee alerted Mr Sutton to the fact that the Bank could rely upon it even if other security was never put in place. Although the court found that there had been discussions regarding converting the overdraft into a term loan, it was clear from the language of the correspondence that there was no concluded agreement to that effect – that was merely a contingent aspiration. The Bank therefore summarily succeeded on its claim.

WM Comment

This decision will be welcomed by lenders for two reasons in particular. Firstly, the court has confirmed that a lender can rely on clear wording of security documentation even if discussions have taken place in relation to future transfer of facilities and/or provision of other security. This will be of some comfort to lenders who may have made similar arrangements for customers throughout the recession who wound down their business and re-traded in a ‘phoenix company’.

Secondly, the decision is a reminder of the relevance and validity of strike out/summary judgment applications in the court process today. Strike out/summary judgment applications can be a very effective method of disposing of a claim quickly and at lower cost than proceeding to a full trial. However there has been a perception recently that lower courts are reluctant to grant such applications and that all but the very most straightforward of matters are required to proceed to a full trial. Whilst every such application would be judged on its merits, consideration should always be given as to whether a case is suitable for strike out and/or summary judgment.

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[1] Barclays Bank Plc v Mr Clive Jeremy Sutton [2015] EWHC 3192 (QB)

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