Many small businesses utilise a standard form credit account application often involving the following statement above the signing block “I agree that if I am a director/shareholder (owning at least 15% of the shares) of the Client [borrower] I shall be personally liable for the performance of the Client’s obligations under this contract.”.
Does this sentence seem familiar? Do you understand how it operates? It may not operate the way you think or intend it to operate.
Small businesses often rely on credit account applications to finance their operations. In many cases, such applications require the business owners, such as the directors and shareholder, to provide a guarantee for the repayment of the line of credit. However, recent court cases in NSW have highlighted the importance of ensuring that such guarantees are drafted in clear and unambiguous language, with specific terms that leave no room for doubt or ambiguity.
One such case is Aquawest Pty Ltd v Twynham [2017] NSWSC 652, which involved a credit application where a director/shareholder guarantee was given for the repayment of credit. The guarantee in question stated that the director/shareholder "hereby guarantees to the [creditor] the due and punctual payment of any amount owing to the [creditor] by the [company]." However, there was uncertainty as to whether the guarantee was intended to be joint and several, or several only.
The use of a forward slash between "director" and "shareholder" in the guarantee created ambiguity as to whether the guarantee was given jointly by the director and shareholder, or if it was given by the director or the shareholder individually. This ambiguity contributed to the Court's finding that the guarantee was unclear and uncertain in its terms.
The Court found that guarantees must be clear and unambiguous in their terms, and that any uncertainty or ambiguity will be construed against the party seeking to rely on the guarantee. In this case, the ambiguity in the guarantee meant that the director/shareholder was not bound by its terms.
This case highlights the importance of ensuring that director/shareholder guarantees are drafted clearly and unambiguously, in order to ensure that they are legally binding. Small businesses should seek legal advice when drafting or relying on such guarantees, in order to avoid any ambiguity or uncertainty that could lead to disputes or legal challenges in the future.
When drafting director/shareholder guarantees in credit account applications, it is important to use clear and specific language, and to avoid using ambiguous terms or symbols such as forward slashes. The guarantee should clearly state the obligations and liabilities of the director/shareholder, including the amount and duration of the guarantee. If there are any limitations or caps on the amount of the guarantee, these should be clearly stated as well.
In conclusion, director/shareholder guarantees are a common requirement in credit account applications for small businesses in Australia. However, recent court cases have highlighted the importance of ensuring that such guarantees are drafted in clear and unambiguous language, with specific terms that leave no room for doubt or ambiguity. Small businesses should seek legal advice when drafting or relying on such guarantees, in order to avoid any uncertainty or ambiguity that could lead to disputes or legal challenges in the future.
If you have any questions regarding how your business utilises director/shareholder guarantees in your terms of trade, or credit account application, then do not hesitate to contact our specialist commercial lawyers at Jenkins Legal & Advisory.
This article is not legal advice, and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.