The High Court recently heard the case of Maxted and another v Investec Bank plc , which looked at whether amending loan agreements multiple times would discharge a personal guarantee given by the directors of the borrower companies. It was held in this instance that even though the underlying agreements were amended several times, the guarantee was unaffected because the guarantee included a “consent to variation” or “indulgence” clause which meant that the guarantors had consented to amendments to the loan agreements of the type in question.
A guarantee is a “secondary obligation” to perform an obligation of some other person (the “primary obligation”) where they fail, or are unable, to do so. It is a common way for a lender to seek protection from the risk of a borrower defaulting on a debt by requiring a guarantor to repay an amount owed by the borrower if the borrower fails to pay it itself and are often given by directors of a borrower company.
Due to a guarantor’s liability being dependent on the underlying primary obligation, the guarantee may be discharged if the contract containing the underlying obligation is materially amended. Accordingly, if the parties to the underlying contract (e.g. a lender and borrower) wish to amend that contract, they must do so in a way which does not accidentally discharge the guarantor from its liability under the guarantee.
To avoid this situation, it is common for a guarantee to include a “consent to variation” or “indulgence clause”. This clause will state that the guarantor consents in advance to future amendments or variations to the underlying contract and, even if the underlying primary obligation is amended without the guarantor’s consent, the guarantee will not fall away. The inclusion of such a clause is considered market practice but previous case law has suggested that this kind of clause is not always effective and may depend, amongst other matters, on the facts of the particular scenario.
•Three group companies (the borrowers) entered into separate loan agreements with Investec Bank plc (the lender).
•The amount of one of the facilities was increased and the interest payable under all three loan agreements was guaranteed by Robert Maxted and John Lorimer (the guarantors) who were two of the borrowers’ directors. The guarantee was capped at 450,000 euros (plus interests, costs and expenses) and included a clause stating that the guarantee would not be discharged by any variation or amendment of any agreement between the lender and the borrowers.
•The loan agreements were all later amended, to roll up the interest on the loans and extend the term of the loans.
•Although the loan agreements were amended, the guarantors signed a statement to confirm that the lender could continue to rely upon the guarantee previously given and each guarantor waived his option to obtain independent legal advice.
•In December 2016, a formal demand was issued on the guarantors by the lender, to pay the interest payable on the loans.
•The guarantors refused to pay, claiming that:(2) although they had signed the documents which approved the amendments to the loan agreements: •their business partner usually dealt with banking arrangements;
•they did not remember being consulted about the amendments to the guaranteed obligations;
•they did not receive any advice in their capacity as guarantors, relating to those amendments; and
•(3) they were acting under the undue influence of the lender when they waived their right to seek independent legal advice in relation to the guarantee because, by including the “consent to variation” clause, the lender created a relationship of trust and confidence between it and the guarantors, which gave rise to a presumption of undue influence.
•(1) the guarantee had been discharged by the amendments to the loan agreements because they were outside the scope of those permitted amendments envisaged by the “consent to variation” clause in the guarantee; and
•And so, for the reasons set out above, they were not liable to pay the interest payable on the loans.
The court held that the amendments to the loan agreements were within the scope of the “consent to variation” clause in the guarantee because the amendments did not create any new obligations and, having regard to the parties’ intentions and giving the language used its ordinary meaning, it was held that on the facts of this case, rolling up the interest and extending the term were within the scope of the consent to variation clause.
The court also found that the guarantors were not under undue influence when they waived their right to seek independent legal advice. It rejected the argument that a relationship of confidence and trust had been created between the lender and the guarantors and undue influence was held to be irrelevant in this case. The guarantors were considered to be business men who understood the risks associated with giving a guarantee and there was a commercial relationship between the borrower and the lender.
This case deals with a common situation where the directors of a borrower company are guaranteeing the company’s obligations. It shows the “consent to variation” clause working in the way lenders intend it to work and it is also helpful in confirming that, in most situations, there is no real separation between individuals in their capacity as directors and guarantors of a borrower. However, whether a “consent to variation” clause will be effective will still depend on the nature of the amendments and how the consent is drafted.
The court dismissed the claim that there was no guarantor consent and that they were not consulted about the changes to the loan agreements. The guarantors had obtained knowledge by approaching the lender in their capacity as directors to change the terms of the loans and the court held that it would be unrealistic to divide the individuals’ knowledge as guarantors from their knowledge as directors. Furthermore, the fact that they had signed to waive their right to seek independent legal advice as guarantors was held as explicit consent to the variations.
This article was written by Catherine Hayes, Solicitor, Corporate, with assistance from Judith Seifert, Trainee Solicitor.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.