ASKED TO SIGN A GUARANTEE: WORDS OF WISDOM

It is rare for a judgment to include clear guidance to the public on how to avoid problems.  However this can be found in the judgment of Mr Justice Max Barrett in AIB Plc. -v- Rostaff Property Development Limited & ors  [2017] IEHC 533. This is a decision from the High Court of Ireland, virtually all the guidance given is of general interest.

THE CASE

The claimant was seeking to recover sums under a guarantee. It was defended by the guarantor on the grounds that she did not knowingly sign the guarantees. The businessman who asked her to sign the guarantees had been her romantic partner (as opposed to business partner) at the time.

The claimant bank applied for summary judgment. This was not allowed by the judge on the grounds that there were potential defences of undue influence and unconscionable bargaining.

THE JUDGE’S GENERAL GUIDANCE TO ALL THOSE ASKED TO SIGN GUARANTEES

ADDENDUM

A DIFFICULTY REPEATEDLY PRESENTING

(1). Overview

A. The court is repeatedly presented with summary debt proceedings in which persons have, to borrow a colloquialism, acted ‘out of the goodness of their heart’ when deciding: (i) to provide a guarantee to a private limited company operated by a loved one, and/or (ii) to accept membership of, or a directorship or other executive office in, such a company. The following paragraphs are intended to give a sense of the caution that persons ought to bring to such situations.

(2). Engaging a Solicitor

B. In many instances where an individual elects to participate in a private limited company operated by a loved one and engaged in lawful business, much of the financial misery that has followed for such individuals when that company fails could likely have been avoided or ameliorated by availing, before entering into the proposed arrangements, of the services of a solicitor competent in company law. The cost of engaging a competent solicitor to provide such independent advice typically pales in comparison with the financial risk and personal stress that can arise when a company fails. 

(3). ODCE Guides

C. Persons minded to become a company director, secretary or shareholder in a private limited company operated by a loved one and engaged in lawful business will find much of use in the following helpful ‘Quick Guides’ published by the Office of the Director of Corporate Enforcement and available for free on its website:

(1) Directors, Their Duties and Powers, A Quick Guide,

(2) Company Secretaries, Their Duties and Powers, A Quick Guide,

(3) Members and Shareholders, Their Duties and Rights, A Quick Guide.

D. However good the ODCE Quick Guides are (and they are good), they are not intended to be used, and should not be used, as a substitute for the seeking and obtaining, before entering into the proposed arrangements, of independent, client-focused advice from a solicitor competent in company law.

(4). Becoming a Guarantor

E. Giving a guarantee for the debts of a loved one engaged in lawful business (or a private limited company operated by a loved one and engaged in lawful business), is effectively taking a gamble that (a) all will go well and/or (b) that if things go badly, the loved one will act as one expects. Unfortunately, it is a feature of life that companies fail and people do not always act as one might expect. So it is important to be cautious before ever giving a personal guarantee.

F. Again, much of the financial misery that can arise when a guarantee is invoked could likely be avoided or ameliorated by a proposed guarantor availing, before entering into the proposed guarantee, of the services of a solicitor competent to advise on the proposed arrangement. The cost of engaging a competent solicitor to provide such independent advice typically pales in comparison with the monetary risk and personal stress that can arise when demand is made under a guarantee.

G. Useful questions that a person asked to become (a) a personal guarantor to a loved one engaged in lawful business and/or (b) to a private limited company operated by a loved one engaged in lawful business, include, but are not limited, to the following:

(1) How much am I being asked to guarantee?

(2) Could I pay back the amount guaranteed without difficulty?

(3) Do I have to put up assets as security?

(4) Could I afford to lose those assets?

(5) Why does the person seeking the guarantee need it?

(6) Has s/he explored other means of obtaining her or his desired business end?

(7) Can s/he (or a company they operate) be trusted to pay all of her or his (or its) bills?

(8) Am I satisfied to lose money and/or other assets for this person?

(9) Will the financial institution benefiting from the guarantee give me relevant ongoing information?

H. The above questions are by way of general indication only. There is no substitute for obtaining independent, client-focused advice, beforeentering into such arrangements, from a solicitor competent to advise on guarantee arrangements.