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The insolvency court held that an alleged debt, arising from a personal guarantee liability relating to a company share sale agreement, was disputed on grounds which appeared substantial (applying Insolvency (England and Wales) Rules 2016, SI 2016/1024, rule 10.5(5)(b)). The guarantors (directors of the share purchaser) alleged that material misrepresentations were made to them by the vendor shareholders during the course of the negotiations of the share sale agreement, and that their personal guarantees were thus arguably invalid. The statutory demands were set aside. Written by James Stuart, barrister, at Lamb Chambers.
Harrling and another v Midgley and others  EWHC 3278 (Ch)
The case illustrates the potential breadth of the defences available to guarantors who give personal guarantees for the contractual liabilities of their principals (usually companies), especially where those guarantors alleged that they were misled by material misrepresentations.
Here the allegedly misleading statements were not contained in the ‘Information Memorandum’ which was provided to the purchasing company. Instead the guarantors relied upon financial information which was provided to them and their financial advisers during the latter part of the contractual negotiations.
Even where the share sale agreement itself contained express provisions excluding responsibility for the accuracy of statements made or information provided to the purchasers, the guarantors could arguably rely upon material misrepresentations regarding the finances of the company as a basis for invalidating their personal guarantees.
Mr Harrling and Mr Steen were directors of a company, Compuflair, which agreed to purchase the Consultant Services Group of companies (a trading business) from the respondents (the Midgley family).
The purchase price included a £2m element of deferred consideration, payable over a period of time after completion of the sale. The evidence illustrated that the parties recognised that the £2m deferred element was going to be raised by Compuflair from re-financing the assets of the business and from income/profits anticipated from the business.
The true value of those assets and the genuinely anticipated level of income/profit from the business were, therefore, material factors in the parties’ thinking.
Mr Harrling and Mr Steen were each asked to provide £100,000 personal guarantees in respect of Compuflair’s liability to the vendors to pay the deferred consideration. They contended that they agreed to do so relying upon the financial information provided to them by the vendors. When the deferred consideration was not paid, the vendors demanded the £200,000 under the personal guarantees and eventually served statutory demands on the guarantors.
The guarantors alleged that they had been misled into giving the personal guarantees because the financial information was materially wrong, and they applied to set aside the statutory demands.
The court applied the legal principles stated by Hamblin J in Cassa di Risparmio della Repubblica di San Marino v Barclays Bank Ltd  EWHC 484 (Comm) concerning misrepresentations. Silence by itself cannot found a claim in misrepresentation but an express statement may impliedly represent something, by a failure to mention something. The circumstances of a guarantee may result in an implied representation concerning the absence of facts the potential guarantor would reasonably, naturally assume did not exist (Geest plc v Fyffes plc  1 All ER (Comm) 672).
In the present case the vendors’ agents provided the purchaser’s agent with financial information (as to the value of company assets and turnover/profits) shortly before completion of the share sale agreement and execution of the personal guarantees. The court concluded that there was a substantial dispute evident from the contemporaneous correspondence that the vendors knew the purchaser was using and relying upon values and figures provided by the vendors. There was thus a substantial dispute that by implication the underlying values and figures provided by the vendors became representations of fact made by the vendors for the purpose of inducing the guarantors into providing their personal guarantees. There was no exclusion clause within the personal guarantees themselves to prevent the guarantors alleging misrepresentation and reliance.
The statutory demands were set aside.
James Stuart is a barrister at Lamb Chambers. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact firstname.lastname@example.org.
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Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.
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