To assign or not to assign, that is the question
Can a Guarantor be liable to an unknown entity in the event of assignation?
The answer is yes. Lord Bannatyne in the recent Court of Session case of Promontoria (RAM) Ltd v John Moore, dismissed the Defender’s legal challenges that the Pursuer did not have “title to sue” and had no relevant case in law. This decision gives Promontoria approval to sue Mr Moore for the debt they recently bought from and that he had guaranteed 10 years previously with Ulster Bank.
The facts of this case are not uncommon in today’s banking world, where personal guarantees are routinely sought and loan or debt portfolios are bought and sold.
Shortly prior to entering into a facility agreement in June 2007 in which £14.5 million was advanced by Ulster Bank Limited (the “Bank”) to Parker Moore (IOM) Limited (the “Debtor”), John Moore (the “Defender”) signed a personal guarantee in favour of the Bank.
In December 2014 the Bank intimated an event of default to the Debtor and the Defender, and the Defender agreed to pay £1.4 million to the Bank, which was the amount outstanding under the guarantee. Unbeknown to the Defender, in August 2015 the Bank sought to assign (ie transfer) various debts to Promontoria (the “Pursuer”), including the rights under the facility agreement and guarantee. The Pursuer sought to enforce the guarantee and demanded payment from the Defender of £1.4 million. The Defender refused to pay the Pursuer and argued that the Bank hadn’t validly assigned the guarantee.
The Defender argued that the guarantee wasn’t assignable. There was no express or implied right of assignation. The guarantee was for the benefit of the Bank and only the Bank, unless there was a subsequent agreement to vary the position, but no such agreement was ever reached.
The Pursuer argued that there was nothing in the contract of guarantee that rendered it unassignable. There was no express prohibition against assignation and nor was there any question of “delectus personae” (ie a special relationship between the parties involving the selection of a person) meaning that the guarantee couldn’t be assigned.
The court decided that there was no express or implied prohibition of assignation. The court looked at the meaning of the words used in the guarantee and construed the guarantee as a whole. Notwithstanding that the Bank is a defined term, the guarantee couldn’t be read as confined to the original contractual relationship between the Defender and the Bank. The court explained that the “paradigm example” of a right that can be assigned is the right to payment under a contract. The court also looked at the transactional context which it felt supported the argument that the assignation was valid. The Defender was a director and controlling mind of the Debtor. The Defender was not a stranger to the underlying transaction.
A large sum of money was at stake in this case, which no doubt influenced the strategy of the Defender who ran various legal arguments in court. Whilst the judge did express some hesitation when reaching his decision that assignation wasn’t prohibited, he clearly considered the practical context, including the likelihood of assignation and the continuing nature of a guarantee.
The case is another example of the importance of taking care when granting and drafting a personal guarantee – if a borrower wishes to prohibit the possibility of assignation, then clear wording to that effect should be included, or at the outset seek to make consent a requirement of any debt transfer.