The effectiveness of an “all monies” guarantee
Following on from my article last month in relation to the enforceability of guarantees, the Court of Appeal has now considered the effectiveness of an “all monies” guarantee.
It is now usual for a personal guarantee to be expressed as an “all monies” guarantee so that the guarantee covers all of the indebtedness and other liabilities owed by the borrower to the lender. In National Merchant Buying Society Ltd v Bellamy and Another, the guarantee, given by a director of the borrower, said that it covered “all sums which are now or may hereafter become owing…”
If enforceable, this wording results in a guarantor being liable not only for any facility being entered into at the same time, but also:
- The borrower’s existing indebtedness to the lender
- Any future indebtedness incurred by the borrower to the lender
- Any later change to the terms of any facility
Whilst a guarantor could get comfortable with the borrower’s existing indebtedness, what is more controversial, and something they may not have so much control over, is any future facilities or any variations to existing facilities.
In this case, essentially, the court had to decide whether an “all monies” guarantee was enforceable when a variation to the facility had been entered into and the consent of the guarantor – which effectively increased his liability – had not been obtained.
The Court had no hesitation in deciding that, on the face of the document, the guarantee was a free standing “all monies” guarantee and that no surrounding circumstances suggested that it was limited to any specific facility or liability. This does mean, however, that it is possible in the future that, despite the clear wording of a guarantee document, the surrounding circumstances could cut through this. So lenders should be careful not to give any representations that the guarantee is limited in any way. This could cause difficulty for lenders where, for example, the guarantee is limited to a fixed sum based on the value of a new specific facility being entered into by the Borrower, but then the Lender seeks to rely on the guarantee for repayment of other facilities.
From the perspective of guarantors, they need to be aware that it is highly likely that an “all monies” guarantee really does mean “all monies” owed to the Bank. Guarantors should seek, where possible, to have the liability limited to a fixed sum, so at least they know there is a limit to their liability, albeit that it is likely to be across all facilities with the Bank.
Guarantors can get a little more comfortable if they are directors of the Company, so they have some control over decision-making in relation to the borrower’s facilities. However, they could still be outvoted on the Board, a rogue director could act alone in increasing facilities or the guarantor could be removed from Board (and the guarantee would normally continue to exist).