The Personal Guarantee and the Failing Customer
Ridgeway Components Ltd supplies parts to Kestrel Engineering Ltd on 60-day credit terms. Kestrel's owner, Dev, signed a personal guarantee in favour of Ridgeway covering 'all sums now or hereafter owing from Kestrel to Ridgeway.' The guarantee contains no limit and no requirement that Ridgeway first pursue Kestrel. Kestrel falls behind: £85,000 is overdue. Ridgeway's sales director, without legal advice, agrees orally with Kestrel to extend payment by 90 days in exchange for Kestrel placing a larger order. Kestrel then enters administration owing Ridgeway £140,000, of which £55,000 arose from the larger order. Ridgeway demands the full £140,000 from Dev, who says the oral extension discharged him because it was a variation he never consented to.
1. Advise Ridgeway whether the oral extension released Dev from the guarantee, applying the principles governing variations and guarantees.
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The starting point is that a guarantee is a secondary obligation: the guarantor's liability is measured by the principal debt as it stands under the guaranteed contract. A material variation of the principal contract made without the guarantor's consent can discharge the guarantor, because the guarantor agreed to guarantee a particular bargain and the variation substitutes a different one. The rationale is that the guarantor is exposed to a risk he did not agree to bear.
Here the extension of time for payment is a variation of the principal contract. Extending the debtor's time to pay is a recognised category that can release a guarantor, because it deprives the guarantor of the ability to step in and pay at the original due date and then pursue the debtor. The extension was agreed orally and without Dev's consent, so on the face of it Dev has a strong argument.
However, the outcome depends on the terms of the guarantee. If the guarantee contains a clause preserving liability notwithstanding variations, extensions of time, or indulgences granted to the debtor, the discharge is excluded. The facts state the guarantee covers 'all sums now or hereafter owing' but say nothing about variations. That wording is broad as to quantum but does not expressly authorise variations. Ridgeway should therefore check the full instrument for an indulgence clause; absent one, Dev's release argument is likely to succeed in respect of the pre-existing £85,000.
The £55,000 from the larger order is different. That debt arose after and because of the variation, and Dev never guaranteed it. Even if the guarantee survives, Dev has a strong argument that the new debt falls outside the scope of his original undertaking.
2. If Dev is released, what is Ridgeway's position against Kestrel in administration and against its own sales director?
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Against Kestrel, Ridgeway is an unsecured creditor for the £140,000 unless it retained title to unpaid goods or holds another security. In administration, unsecured creditors rank behind administration expenses, preferential creditors and any floating-charge holder's prescribed part. Realistically Ridgeway should register its claim with the administrator, supply proof of debt, and expect a modest dividend, possibly nil. The £55,000 attributable to the larger order is still a provable debt, but the administrator may challenge the order as a preference if Kestrel was already insolvent when it was placed and the effect was to put Ridgeway in a better position than it would otherwise have occupied.
Against the sales director, Ridgeway may have a claim in negligence or breach of authority if the director agreed a material variation without authority and without legal advice, causing the loss of the guarantee. The measure would be the difference between what Ridgeway would have recovered under the guarantee and what it now recovers in administration. The claim is not straightforward: Ridgeway must show the director exceeded authority, that a reasonable director would have sought consent or legal review, and that the loss was caused by the variation. Contributory factors, such as Ridgeway's own credit-control failures, will reduce any recovery.