Signing on behalf of a company - be careful with personal guarantees

If you’re a director of a company, you may very well have been asked to sign a personal guarantee, to guarantee the company’s obligations under a contract – for example, the payment of invoices to a supplier, or the payment of rent to a landlord.  Sometimes, the company and the personal guarantor will need to sign the same document – and in this case, if you are the guarantor, it is imperative that when you sign the document, it is clear whether you are signing in your capacity as a director of the company, or in your personal capacity as a personal guarantor.

This issue was considered by the Victorian Supreme Court in the case of T W Timber Treatment Pty Ltd v Giddings [2022] VSCA 147 which dealt with the enforceability of a director’s personal guarantee on an application for credit trading terms.  In this case, a business provided a credit application to its corporate customer, noting that it required the director’s guarantee section to be fully completed.  On the form, in answer to the question “are directors prepared to sign directors’ guarantees?”, the answer NO was selected.  Later in the form was a section with the statement: “We, being directors or proprietors, acknowledge the agreement to guarantee and indemnify and agree to your trading terms.”  The director in question then inserted his name and home address, and signed the document.

The business subsequently supplied timber to a company and shortly after the company was placed into voluntary administration and ultimately wound up and deregistered, owing the business over $282,000 for timber.

Claiming against the director - trial judge's decision

The business pursued the company’s director, relying on a personal guarantee that it says was given by the director.  At first instance, the trial judge looked at the director’s intentions. The director argued he  only signed the document in his capacity as a director. The judge thought it was significant that in answer to the direct question as to whether the director was willing to provide a personal guarantee, the direct answer of NO was given.  The judge therefore held that the director did not intend to enter into legal relations in his personal capacity as a guarantor and therefore was not required to pay the debt.

On appeal

The business appealed.  On appeal, the Court again looked at the principles surrounding contract interpretation – including the principle that a person’s intention to be legally bound by any contract, including a contract of guarantee, is to be determined objectively and not by reference to uncommunicated subjective motives or intentions of the parties.  You need to look at “the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances.”

The Court considered the fact that the director’s signature was on the document – and noted that “for the purpose of objectively determining the intention of parties to enter legal relations, the presence of a signature ordinarily conveys a representation to the reasonable reader that the person who signs the documents has either read and approved its contents or is willing to take the change of being bound by them.”

However it also recognized that in relation to this document, signatures were required by the director in 2 capacities – as a director and as a guarantor.  It noted that the director’s signature directly underneath the acknowledgement of the guarantee and indemnity did not have any qualification or limitation in any respect as to the capacity in which it was applied.  The Court referred to the 2002 case of Follacchio and Harvard Securities[1] where the judge noted that there is no reason why a signature cannot be applied in more than one capacity, so long as the capacity or capacities in which the signature is applied is clear.

The Court conducted a thorough review and analysis of the terms contained in each page of the contract, and the places in which the director signed, but also acknowledged that the document need to be construed as a complete whole, although each part of the whole has its particular purpose.  The Court ended up holding that the director was in fact bound by the guarantee contained in the contract, and was liable to repay the company’s debt.

Lessons

So it is really important that if you are entering into a contract on behalf of a company for which you are a director, you need to ensure and be clear about the capacity in which you are signing the document.  If you are signing the document as a director and as a guarantor, to avoid any confusion, you should always sign twice, in both capacities.