Is my personal guarantee still enforceable if my directorship was terminated due to the company’s liquidation?

A recent High Court decision in Nirro Holdings SA v Patrick O’Brien [2021] EWHC 279 (Ch) considered whether the term of a personal guarantee, given by a director over the debts of a company, were enforceable in circumstances where the director’s office had been terminated as a result of the liquidation of the company.

In Nirro, Mr O’Brien and his wife were directors and (originally) 100% shareholders in a company specialising in audio visual and conferencing facilities. In 2014, the company secured an agreement to supply video conferencing facilities to Google’s offices in Russia. It was required to have a joint venture partner for the deal and so entered into an agreement with a subsidiary of Nirro.

Nirro made a series of loans to the company, for which Mr O’Brien provided personal guarantees (as if often required to provide security to lenders). The company then failed to repay the loans and was placed into administration in 2016 and, in 2017, was dissolved and removed from the companies’ register.

One clause in the guarantee given by Mr O’Brien, required that he irrevocably and unconditionally guarantee the proper and punctual performance of the guaranteed obligations of his company. He further guaranteed that he would also remain a member of the board and a shareholder of the company. A later clause in the guarantee provided that, on or after a “Significant Event”, the guarantor (Mr O’Brien) would fully perform the guaranteed obligations and be liable to Nirro for losses, costs and expenses resulting from the breach. A “Significant Event” was defined to include “the guarantor resigning or otherwise ceasing to be a member of the board of directors of the Company for any reason other than ill-health, death or by mutual agreement”.

Nirro claimed that the company owed it in excess of £1.9m under the terms of the loans and that Mr O’Brien was obliged to pay that amount under the terms of the guarantee, arguing that as Mr O’Brien had ceased to be a member of the board of directors (because the company had been wound up).

Mr O’Brien, meanwhile, denied that his ceasing to be a member gave rise to a ‘Significant Event’. The case came down to a matter of contractual interpretation, as he argued that the events anticipated by the agreement giving rise to his liability included his resigning (because he would the no longer be contributing to the success of the company), rather than his being removed upon the company’s liquidation. References to the “company” implied an existing entity and so, as dissolution was not specifically referred to as a “Significant Event”, O’Brien argues it was not a triggering event.

So what did the courts decide and does it mean a guarantee is still enforceable if you cease to be a director because your company is in  liquidation?

Deciding the matter in Nirro’s favour, the judge concluded that a “Significant Event” was defined to include Mr O’Brien’s ceasing to be a director in any circumstances, including the liquidation of his company. It therefore followed that he was liable to Nirro in respect of the debts owed to it.

Whilst every guarantee will be limited to its circumstances and the specific wording used it both the guarantee and any loan agreement to which it relates (as well as any earlier agreements between the parties which have been superseded, as was the case in Nirro), this recent case highlights the importance of seeking independent advice before entering into a personal guarantee.

Personal guarantees are becoming increasingly commonplace in the current commercial market and so, if you require advice on a personal guarantee (whether new or existing), why not speak to one of our specialist corporate and commercial law solicitors on 01782 262031.