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It pretty well goes without saying that, especially where small companies are concerned, and lender will insist on personal guarantees from the directors. No-one ever gave a guarantee expecting it to be called up, so when things do go wrong directors are often exposed in ways they never envisaged when they formed a “limited” company. And their surprise is all the greater when they had resigned from the company some time before the failure.

That’s what happened in the recent case of National Merchant Buying Society v Bellamy and Mallett. Messrs Bellamy and Mallett were directors of a company called CTF Supplies Limited. Initially the company had a credit limit of £30,000, which was subsequently increased to £200,000 in 2002. As the facilities were increased the directors were asked for personal guarantees, which they (happily or otherwise) gave. Over time the facility was increased tho £400,000 and, later, to £700,000.

By the time that the limit was raised to £700,000, Mr Mallett had resigned from his directorship of the company. He claimed that, whist he had agreed to the increase to £400,000, he knew nothing of the later increase to £700,000. He argued that the increase, without his consent, was a material variation of the contract and consequently that his liability under the guarantee had been extinguished.

Sadly for Mr Mallett, the Court disagreed. The guarantee was an “all monies” guarantee, and not restricted to a particular amount or obligation. The lesson is that guarantors should always ensure that the terms of the guarantee are as precise and restricted as possible, and that directors departing the company should make sure that every loose end is properly tied up before they go. A demand coming out of the blue for a large sum of money, perhaps years after the event, can be a nasty shock!