Sale of security under legal charge — Outstanding debt — Allegation of sale at undervalue — Effect on liability of guarantors — Whether creditor owing duty of care to guarantor — Whether terms of guarantee excluding defence based on sale at undervalue
The claimant bank held a legal charge over a football ground, securing a loan to the football club that owned the ground. The defendants, as directors of the club, were guarantors of its liabilities under the charge. The guarantee was in the claimant’s standard form, which defined the customer liabilities of the club as “any money and liabilities which the Customer now owes us or may owe us in the future”. It was stated to guarantee the full amount of all customer liabilities, subject to a cap on the amount the defendants would have to pay. By clause 6, it provided that each of the defendants “will be liable as a principal debtor for any Customer Liabilities that cannot be recovered from you as a guarantor, whatever the reason and whether or not we know the reason”.
The club subsequently went into administration, and the ground was sold by the administrators. After the club was eventually wound up, and distribution made to creditors, part of the outstanding loan remained unpaid. The claimant brought proceedings against the defendants, seeking to recover under the guarantee. By their defence, the defendants submitted that the property had been sold at an undervalue, and that the claimant had breached its equitable duty of care by causing or permitting such a sale by the administrators.A preliminary issue was tried as to whether, assuming the defendants’ argument to be well founded, the express terms of the guarantee were none the less effective to exclude such a defence and to render the defendants liable for the outstanding sum. The claimant argued that the guarantee made the defendants liable notwithstanding any careless realisation of a security given by the principal debtor, and submitted that it owed no duty of care to the defendants.
Held: The preliminary issue was determined in favour of the defendants.
(1) A guarantor of a principal debtor’s liabilities was interested in the security in two respects. First, if, before realisation of the security by the creditor, it paid the amount owed, it would be entitled to the security by way of subrogation to the rights of the creditor. Second, its liability, like that of the principal debtor, fell to be extinguished or reduced by the amount realised by the creditor. The second of those interests gave rise to a duty on the part of the creditor, if it realised a security for the liabilities of the principal debtor, to do so at a proper price: Standard Chartered Bank v Walker [1982] 2 EGLR 152; (1982) 264 EG 345, American Express International Banking Corporation v Hurley [1985] 3 All ER 564 and Stott v Skipton Building Society [2000] 1 QB 261 applied; Burgess v Auger [1998] 2 BCLC 478 distinguished; Barclays Bank Ltd v Thienel [1978] 2 EGLR 116; (1978) 247 EG 385 wrongly decided. Although the principal debtor would ordinarily be expected to pursue any claim against the creditor in respect of a sale at an undervalue, the existence of a distinct duty to sureties could be relevant where, as in the instant case, the debtor had ceased to exist or for any other reason did not pursue the claim.
(2) Construing the guarantee as a whole and as a commercial document, it did not render the defendants liable if the claimant had been responsible for a sale at an undervalue. On a sale of the security, the “money and liabilities which the Customer now owes” were reduced by the sum that the claimant had received, or should have received, on the sale. If the claimant had caused a sale at an undervalue, and a sale at a proper price would have reduced or extinguished the club’s liability, the liability of the defendants to the claimant would be similarly reduced or extinguished: Continental Illinois National Bank & Trust Co of Chicago v Papanicolaou (The Fedora, The Tatiana and The Eretrea II) [1986] 2 Lloyd’s Rep 441 distinguished. Clearer words would be required to impose upon a surety a liability exceeding that of the debtor. The effect of clause 6 was to render the defendants liable as indemnifiers should their liability as guarantors be discharged or reduced. An indemnifier was similarly entitled to have its liability reduced by the amount that a creditor should have realised on the sale of a security; the creditor owed the same equitable duty to a person who had given an indemnity against a debtor’s liabilities as it did to a guarantor.
Adam Zellick (instructed by Matthew Arnold & Baldwin, of Watford) appeared for the claimant; Thomas Roe (instructed by Manches LLP) appeared for the defendants.
Sally Dobson, barrister
