Guarantees and indemnities are normally executed as deeds. But what happens if the formalities for executing a deed are not complied with? Is the guarantee enforceable? What about an indemnity? A recent case provides some guidance.
What was the case about?
A company was trying to stave off insolvency proceedings by claiming that the two deeds of guarantee relied upon by the creditor were not enforceable. The two guarantees had been signed by only one company director.
What was the problem with the guarantees?
There are certain specific ways in which deeds may be executed depending on who is entering into them. This case concerned a limited company and in order to comply with the necessary formalities (set out in section 44 of the Companies Act 2006) a limited company may execute a document as a deed either by:
- affixing its common seal; or
- the signature of two authorised signatories; or
- a director of the company signing in the presence of a witness who attests the director’s signature.
In this case, the director had signed, but his signature had not been witnessed.
Were the guarantees enforceable?
The guarantees had not been validly executed as deeds because the signature of the director had not been witnessed, as required, for the execution of a deed by a company. However, the High Court held that the two guarantees were enforceable in the contract so the creditor could rely on them. All the necessary elements for the formation of a contract were present, including consideration. This was so, even though the funds under one guarantee had been advanced by the creditor before the guarantee was entered into.
General Point
You should always check that any documents are properly and validly executed and that the necessary formalities are complied with. This is especially important when it is a document which you intend to rely upon i.e. where you are benefitting from the document. Note also that the formalities for deeds are different from those for an ordinary contract.
What are the particular implications of this case for a surety?
The case is interesting for sureties because the principles set out would apply equally to any document which was intended to be entered into by a limited company as a deed, but which didn’t meet the requisite formalities. For example, if you have an indemnity which each of the indemnitors should execute as a deed, then all is not lost if the indemnity has not been executed as a deed by some or all of the indemnitors.
Case reference: Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch)