When companies go bust, creditors are often quick to bring claims against directors personally for large sums under personal guarantee agreements which the directors (often unknowingly) signed in order to obtain credit accounts with suppliers. Directors can be faced with the unwelcome prospect of losing their home and bankruptcy.
One argument we commonly see is the ‘change in credit limit’ argument. This can take various forms but often involves the following points:
- When I agreed the credit account, the credit limit was X
- But it was increased several times without me being notified/specifically agreeing to the increase and is now considerably higher.
- So I am only liable to pay a sum up to the limit originally agreed; or
- I am not liable to pay anything.
This defence is based on a number of cases following the leading case of Holme v Brunskill where judges have decided that substantial changes to a contract have caused the guarantee agreement relating to those contracts to be cancelled, freeing the guarantor from liability.
However this ‘defence’ is often misunderstood. There is no general legal rule that causes guarantees to be cancelled just because the limit of credit which is guaranteed has been increased. What is important is the wording of the guarantee and what exactly was agreed.
Where, for example, a director has agreed to guarantee all the debts owed by their company to the supplier, without any limitations, it is unlikely that this sort of argument will help. However, it can be of assistance where the guarantee agreement specifically mentions a credit limit and changes have been made to this which are not agreed or notified to the director.
In certain cases, changes to standard terms may also be significant. If the guarantee agreement only applies to orders made under the terms which existed at the time it was agreed, then orders made under new terms might not be caught by it, even if only some parts of the terms are changed. Furthermore, significant changes, particularly those which impose obligations which are more difficult to comply with (such as more stringent payment obligations), can potentially cause the guarantee agreement to be cancelled altogether.
Thursfields’ dispute resolution team are leading experts in relation to guarantees, acting on behalf of creditors and directors in respect of claims brought to recover unpaid debt. Whether you are a director facing such a claim or a creditor wanting to pursue an overdue account, we can give you expert advice and help you decide on the right strategic approach.