Invalidly executed deed of guarantee enforceable in contract

Our summary of the requirements for formalities of contracts likely to be encountered by invoice financiers referred to above also explains the circumstances in which certain contracts executed as deeds require formalities such as in some cases the presence of a witness.

Guarantees (whether given by individuals or by limited companies) are not strictly required to be made by deed, but in practice they usually are to avoid any problems arising from the doctrine of consideration. This doctrine essentially provides that the financier must give something in return for the security it is receiving, and since this is normally the act of entering into the invoice finance agreement this requirement would not be met if the agreement had already been entered into when the security was signed – in those circumstances the law would regard consideration given by the financier as “past” and ineffective.

There has in the past been some doubt as to the enforceability of a contract which is not required to be made by way of deed but which is expressed to be a deed by way of choice, but in relation to which the formalities required for the execution of a deed have not been properly complied with. We have in the past successfully argued in court that such a contract can be enforced as a simple contract provided that the financier can demonstrate that consideration has been provided, and this approach was endorsed in the recent case of Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch).

In this case the High Court considered whether two deeds of guarantee were enforceable against the applicant company in circumstances where they had been signed on the applicant’s behalf by its sole director, but the signature had not been attested by a witness in accordance with the requirements of section 44(2)(b) of the Companies Act 2006 in relation to the execution of deeds.

In an application to restrain the presentation of a winding up petition the applicant submitted that as the guarantees were not properly executed, they were invalid as deeds and therefore incapable of enforcement by the respondents. The applicant also submitted, and the court accepted, that since the invalidity of the guarantees as deeds appeared on their face, the respondents could not invoke the doctrine of estoppel (ie. the argument that the applicants could not be seen to “blow hot and cold” at the same time in on the one hand signing the document as if it were valid and then disputing its validity) to assert that they nevertheless bound the applicant.

The respondents contended that whilst the lack of attestation prevented the guarantees taking effect as deeds, they were nonetheless enforceable as a matter of simple contract law. Under section 43(1)(b) of the Companies Act 2006, all that was required for the validity of a contract entered into by a company was for it to be made by a person acting under its authority (express or implied), and it was clear on the facts that the executing director was so authorised. The respondents submitted that the two guarantees could therefore stand as simple contracts, and they were sufficiently supported by consideration to be enforceable as such.

The court ruled in the respondents’ favour, holding that the guarantees were properly enforceable against the applicant as simple contracts:

“I am entirely satisfied that the law is (and still is) as stated in the penultimate paragraph of paragraph 2-021 of the 7th (2015) edition of Andrews and Millett: The Law of Guarantees. There it is said that if an otherwise complete contract of guarantee is intended to be embodied in a deed but the formalities have not been complied with, the creditor can still enforce the agreement”.

The court was also satisfied that on the facts, the guarantees were sufficiently supported by consideration:

“I am satisfied that the loan was entered into as part and parcel of a series of interlinked transactions involving not only the entry by the borrower into the loan agreement, but also the entry by the applicant company into the guarantee”.

Comment 

This is a sensible decision confirming the position as we have argued it for some time, both in terms of the enforceability of a Guarantee which was clearly intended to take effect as a valid and binding legal obligation, and in its approach to defeating highly technical arguments on “past consideration” by adopting the common sense approach of whether the Guarantee was understood to be “part and parcel” of the commercial transaction as a whole.

Contact our Invoice Finance team.