Rare appellate decision on a very common argument

In what circumstances can a guarantor avoid a call on the guarantee by the lender on the ground of misrepresentation? Joseph Curl, barrister at 9 Stone Buildings, reviews the appellate decision in Gaind v Dunbar Assets plc in which he acted for the lender.

Original news

Gaind v Dunbar Assets plc [2016] EWHC 3187 (Ch), [2016] All ER (D) 89 (Dec)

The Chancery Division dismissed the applicant's appeal against the finding of a district judge dismissing his application to set aside a statutory demand made by the respondent company. The applicant had made a personal guarantee in the process of funding a third party company. The court held that the applicant could not rely on the words of an employee of the respondent to the effect that the relevant bank never called in personal guarantees.

What are the practical implications of this case?

Although the form of argument encountered in this case—'don't worry about the personal guarantee, we don't call them in'—is routinely raised at county court level, there is a lack of High Court authority dealing with it. This may well be because the argument seldom succeeds and debtors who raise it lack the resources to pursue it on appeal. Gaind shows why the argument (in its actionable misrepresentation form) tends not to succeed.

What was the background to this case?

In 2006, the appellant had granted the lender a personal guarantee for £1.1m for the debts of a Guernsey registered company under his control to fund a development. The lender advanced just under £9m to the principal debtor. All the lending was repayable on demand. With the economic downturn, the lender stopped funding the development, which was unable to proceed. The lender made demand in 2013 on the principal debtor for repayment of what was by then a debt of about £10m and, shortly afterwards, made demand on the appellant under the guarantee for payment of £1.1m. No payment was made and the lender served a statutory demand. The appellant made an application to the county court to set aside the statutory demand.

Central to the appellant’s arguments was the allegation that an officer of the lender had made a series of statements that amounted either to misrepresentations or promises. The appellant identified numerous matters that he said amounted to misrepresentations, which can be grouped into two categories:

  • first, the lender was said to have represented that it would fund the entire build-out of the development, not merely its initial acquisition, but that this 'historical practice' had 'changed overnight' to a 'new and more hesitant approach' after the financial downturn in 2007
  • second, the lender had represented that although it required personal guarantees as a matter of course, its policy was not to call them in

At first instance before District Judge Bishop in the County Court at Croydon, the appellant raised a variety of arguments in support of his application:

  • a failure to follow any pre-action protocol
  • abuse of process
  • breach of (an alleged) duty of care owed by the lender
  • promissory estoppel arising from the alleged statements that:
    • the lender would fund the build out of the entire development, and
    • the lender did not call in personal guarantees
  • actionable misrepresentation permitting the appellant to rescind the guarantee, based on the same alleged statements

District Judge Bishop dismissed the application.

The appellant appealed to the High Court solely on the basis of the actionable misrepresentation argument. Permission to appeal was granted on paper by Henderson J. The appeal then came on before Mr Murray Rosen QC (sitting as a deputy High Court judge).

What were the issues before the judge?

It was common ground that in order to be an actionable misrepresentation, a statement must be untrue at the time it is made and must have induced the appellant to enter into the guarantee. In his application for permission to appeal, however, the appellant had contended that the proper test for actionable misrepresentation was a subjective one—ie what was the effect that the alleged statements had on the appellant specifically? It was submitted that that question could only be answered at trial, having heard the appellant cross-examined. Therefore, the appellant argued, the matter was unfit for the statutory demand route. By the time of the hearing, however, the appellant had conceded that the test was an objective one—ie what was the meaning to be given to the alleged statement according to the objective understanding of the reasonable businessman in the prevailing circumstances in which the statement was made (see para [15]). This was a concession that was plainly correctly made. As Mance LJ (as he then was) put it in MCI WorldCom International Inc v Primus Telecommunications Inc [2004] EWCA Civ 957, [2004] All ER (D) 418 (Jul):

Whether there is a representation and what its nature is must be judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee.

Although the lender doubted that the alleged statements had been made, it conceded that for the purposes of the appeal, the court should proceed on the assumption that the appellant would come up to proof in his assertion that the alleged statements were made by an officer of the lender. The issues, therefore, can be summarised as:

  • were the alleged statements untrue at the time they were made?
  • what was the objective meaning of the alleged statements?
  • did the appellant rely on the statements such that he was induced by them to grant the guarantee?

What did the judge decide, and why?

The deputy judge had little hesitation in dismissing the appeal. The deputy judge pointed out that there was no evidence going towards the falsity or otherwise of the representations but, in any event, the comments concerned (at most) 'an existing policy as regards guarantees given to date' and, accordingly, 'had no application to any future change of policy or any future decision' about enforcement. That was fatal for any argument based on actionable misrepresentation, where the representations must be untrue at the time they are made, not subsequently falsified by events.

Of most interest to those who take personal guarantees from company directors, the deputy judge made some comments about reliance and inducement:

No reasonable businessman could have or would have relied upon [the lender’s] oral statements about the requirement for the guarantee…or as regards the bank’s position generally or as a matter of policy as regards enforcement…

Indeed, to my mind, any businessman, in particular any property developer for a project of this size, who entertained such a belief or hope would be very unlikely ever to be in a position to carry out a deal to arrive at finance of this nature. It would be a wholly unrealistic position for such a developer to adopt. (paras [34]-[35])

To what extent is the judgment helpful in clarifying the law in this area?

No new ground is broken by this decision, but the comments of the deputy judge set out above concisely encapsulate the sort of reception guarantors can expect from the courts when they bring forward arguments of the kind advanced in this case. While each case will depend on the evidence and, in particular, the contemporaneous documents and any correspondence, lenders may find it useful to have a decision at High Court level that can be shown to a busy district judge setting out the proper approach.

An example of the High Court rejecting an instance of the promissory estoppel version of the 'don’t worry about the personal guarantee…' argument can be found in Dunbar Assets plc v Butler [2015] EWHC 2546 (Ch), [2015] All ER (D) 138 (Sep). For further reading on that decision, see blog post: Setting aside a statutory demand.

A further contribution to this body of case law will shortly be provided by the Court of Appeal, where the promissory estoppel version of this argument is an element of the submissions made (on a second appeal) by the appellant in the long-running litigation in Harvey v Dunbar Assets plc (No 2) [2015] EWHC 3355 (Ch), [2015] All ER (D) 02 (Dec). In that case, the matter has proceeded to the Court of Appeal by reason of its novel repeat litigation dimension but it is likely, however, that the Court of Appeal will also address the 'don’t worry about the guarantee, we don’t call them in' aspect of the appellant’s argument.

Case details

  • Court: High Court, Chancery Division
  • Judge: Mr Murray Rosen QC, sitting as a deputy High Court Judge
  • Date of judgment: 8 November 2016

Interviewed by Stephen Leslie.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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What to do if you are served with a statutory demand and you dispute the debt

The effect of insolvency on guarantees

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First published on LexisPSL Restructuring and Insolvency

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