IIG Capital Llc v Van Der Merwe CA May 2008
The issue of whether personal guarantors had to pay under their guarantees arose recently before the Court of Appeal. IIG Capital Llc (IIG) were seeking to recover an unpaid loan from the director-shareholders of the borrower who had provided personal guarantees in respect of all moneys and liabilities owed to IIG by the company. IIG had demanded repayment of its loan and placed the company in administration. Shortly after demanding payment from the company, with the debt still outstanding, IIG made a demand for payment under the personal guarantees. The guarantees contained a number of familiar and widely used clauses that were considered crucial in determining the obligation of the guarantors to pay:
- Liability of guarantors: The liability of the guarantors was expressed to be “as primary obligors and not merely as surety” to “unconditionally and irrevocably” guarantee “due and punctual payment of the Guaranteed Moneys” [being ‘all moneys and liabilities …due, owing, payable or expressed to be due, owing or payable…to’ IIG].
- Conclusive evidence: The guarantees contained the provision that a “certificate in writing signed by a duly authorised officer… of” IIG “stating the amount … due and payable by the Guarantor …shall, in the absence of manifest error, be conclusive and binding on the Guarantor…”
IIG claimed that demand for payment under the personal guarantees having been made, the guarantors had a primary liability to pay the moneys certified as due by the duly authorised officer. The guarantors were appealing against liability on the grounds that the instrument was of a secondary nature, a guarantee, rather than a primary obligation such as a demand bond.
In determining the nature of the obligations under the guarantees, the judges held that it is necessary to consider the circumstances in which a guarantee is given, the identity of the parties and to conduct an “anxious scrutiny of the language of the clause … in order to ascertain whether the guarantee is secondary or primary”, rather than merely rely on any label given to it. In the opinion of the Court of Appeal there is a strong presumption against an instrument being a demand bond outside a banking context; a personal guarantee would require clear language in the operative clauses to rebut this presumption.
In construing the personal guarantees given in this case the Court of Appeal considered what the guarantors had agreed to do. Starting with the presumption that the instrument was not a demand bond, but looking at the documents as a whole and taking into account certain provisions suggestive of the instrument creating a secondary liability (the guarantees contained common terms relating to the preservation of the guarantee in the event of variation of the underlying facility, waivers in favour of the company and other events which at common law would release a guarantor), the Court of Appeal turned to the operative clause. This clause, they said, would need to be expressed in clear language to rebut the presumption that each guarantee was not a demand bond.
The Court of Appeal held that the use of “primary obligor and not merely surety” in the guarantees and the undertaking to pay “on demand and unconditionally” all moneys and liabilities due, owing and payable or expressed as due and owing by IIG made it clear that the guarantors’ obligations were more than secondary.
The Court of Appeal also considered the effect of the ‘conclusive evidence’ clause. Such a clause is intended to provide that, if notice of default is given stating the amount due, that notice is conclusive evidence that the guarantor’s liability to pay the amount stated has accrued. If validly given, these notices have been held to be binding on the guarantor in cases involving performance bonds. In the opinion of the Court of Appeal, the inclusion of the conclusive evidence clause in the personal guarantees was a clear indication that the guarantors had bound themselves as primary obligors to pay the amount stated in the certificate. The only challenges to the lender’s certificate would be a ‘manifest error’, which the Court of Appeal interpreted as meaning something obvious and clearly demonstrable and not applicable in this case, or a challenge to the authority of the person signing the certificate.
The Court of Appeal heard this application by the guarantors because the guarantees in issue contained “common terms” and consequently the decision would have “ramifications”. Financiers will be heartened by the judgment dismissing the guarantors’ appeal against their liability to pay the sums demanded. However, some key points should always be remembered in drafting personal guarantees:
- The context of the guarantee is important. In this case the company run by two director-shareholders (the guarantors) was borrowing money for a business over which the director-shareholders had complete control.
- There is a strong presumption against guarantees being demand bonds ie, primary obligations independent of the underlying contract. There must be clear and sufficient indications in the wording of the guarantee to displace the presumption. The court will construe the guarantee on its terms and not rely on any label the parties attach to it.
- A conclusive evidence clause may not automatically turn a guarantee into a demand bond, but its inclusion in the instrument may support a rebuttal of the presumption against the instrument being a demand bond. In those circumstances, validly given and free from manifest error, the certificate is binding on the guarantor as to liability to pay and the amount due.
This is obviously good news for financiers and confirms the need for well-drafted security documents containing additional powers which make the enforcement considerably simpler and more cost effective.