GUARANTEES – GET IT IN ‘BLACK AND WHITE’ OR RISK BEING SORRY!

Posted by Dasha Kovalenko-Gormack on March 3 2021 in News

If you own a business, borrow/lend money or have bought property, chances are you have come across guarantees.

Lenders see a guarantee as a form of security. However, it is important to understand how to best protect yourself if you are relying upon the enforceability of a guarantee and what is required for the guarantee to be effective.

In a recent case of Broughman v Regal [2020] NZSC118, the importance of the wording of the guarantee and the need to sign the guarantee (if required) was discussed.

The facts of the case were as follows.

• Mr Broughman was in a relationship with Ms Dey. They set up a company in order to purchase a business together. Ms Dey was a trustee and beneficiary of a trust and had arranged for the trust to lend the company $50,000 to complete the purchase. Both Ms Dey and Mr Brougham were to guarantee $25,000 each.
• Mr Broughman signed the loan agreement (Loan) as a director of the company and as a guarantor. Ms Dey signed the Loan only as a director of the company. The Loan did not specify the obligations of those who signed the Loan as guarantors.  However, the Loan provided that before the money was advanced, any person named in the Loan as a guarantor had to sign a separate written guarantee. Mr Broughman never signed a separate written guarantee.
• The $50,000 was advanced to the company the same day the Loan was signed. Later, the relationship between Mr Brougham and Ms Dey ended. Their company was liquidated.
• The trustees of Ms Dey’s trust attempted to enforce the guarantee against Mr Broughman. Although the trustees were unsuccessful in both the District Court and High Court, the Court of Appeal allowed the trustees’ appeal and held that Mr Broughman was liable as a guarantor for $50,000 together with interest. Mr Broughman appealed to the Supreme Court.

The Supreme Court unanimously allowed Mr Broughman’s appeal on the following basis:  

1. Since a separate guarantee was not signed by Mr Broughman, the Loan alone (that was signed by Mr Broughman in his capacity as borrower and guarantor) did not satisfy the requirement of s 27(2) Property Law 2007 (Act) (that the guarantee was in writing).
2. Where a guarantee names multiple guarantors, the guarantee is ineffective unless it is signed by all guarantors.

In respect of the would-be trustees’ remedies, the Supreme Court noted:

1. Mr Broughman cannot be estopped from his obligations as a guarantor of the Loan, as it would defeat the consumer protection purpose of s 27 of the Act.
2. Mr Broughman cannot be required to sign the guarantee in accordance with the Loan under a specific performance order.

The above case is a cautionary tale for those that may rely on guarantees as a security for lending. The most prudent approach is to seek legal advice to assess your specific scenario and details.

If you are considering advancing a loan to someone or are unsure about your security for an existing loan, feel free to contact us to discuss how you can be best protected.

 

Richard Hatch | Partner | richard.hatch@shieffangland.co.nz

Dasha Kovalenko-Gormack | Senior Associate | dasha.kovalenko@shieffangland.co.nz

Aidan Tattley | Solicitor | aidan.tattley@shieffangland.co.nz

Neeru Kesry | Legal Executive | neeru.kesry@shieffangland.co.nz