Loans made to companies are usually secured by personal guarantees given by the directors of those companies whereby the director promises to be directly answerable for the payment of the debt owed by the company in the event of default.
The personal guarantee therefore provides the lender with surety by the director that the loan will be repaid even if the company were to become insolvent. The lender can only demand payment under the personal guarantee once the borrower has failed to pay.
In the case of Martin -v- McLaren Construction Limited, Mr Martin who was the Chief Executive of Martin Dawn Plc and Chairman of Southend United Football Club, gave a guarantee to secure liabilities owed to McLaren by himself, Martin Dawn Plc and other related companies.
When debts due to McLaren were not paid it served Mr Martin with a Statutory Demand for over £7m with a view to petitioning for his bankruptcy.
A Statutory Demand is a formal written request that a debt must be paid within a certain period of time failing which the debtor may be made bankrupt or, in the case of a company, it may be wound up.
Mr Martin applied to the Court to have the Statutory Demand set aside on the grounds that prior to the service of the Statutory Demand McLaren had failed to validly serve a prior written demand on him calling in the personal guarantee; and therefore the debt claimed under the Statutory Demand was not payable immediately but instead it was dependent on Mr Martin receiving at some future date a written demand for payment from McLaren.
The Court agreed with Mr Martin and the Statutory Demand was set aside.
McLaren tried to argue that it had sent an email demanding payment of the personal guarantee prior to serving the Statutory Demand but this argument was rejected by the Court on the basis that the personal guarantee expressly stated that any demand had to be “in writing delivered personally, by first class prepaid post or fax” and did not permit service by email. Service of the demand by email was therefore ineffective.
This case highlights the technical pitfalls that creditors can fall into.
It is very easy to make a mistake at an early stage that will cause significant problems later. Creditors need to carefully review the security documents and be fully aware of the service requirements for written demands.
It may seem insignificant to a creditor as to whether an email or a letter of demand is issued but invalid service could result in a debtor seeking to set aside a Statutory Demand or a subsequent bankruptcy/winding-up petition and result in the creditor incurring substantial costs and time in defending such an application and become liable for the debtor’s costs in the process.
If you require advice or assistance with the drafting or enforcement of personal guarantees or with any matter concerning the insolvency process then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or by email at LPatel@LawBlacks.com.
