Sale at undervalue can prejudice a lender's ability to claim under a guarantee

In this case1, guarantors successfully claimed that the value of their guarantee should be reduced by the amount lost on sale.

An English football club borrowed a significant amount of money, security for which was given over its football stadium. The loan was guaranteed by the directors of the club up to a maximum amount of £100,000.

Administrators were subsequently appointed to the club, who sold the stadium and other assets. However, the lender still had unsatisfied indebtedness of £136,000.

Demand was made under the guarantee, but the guarantors claimed that the bank sold the property at an undervalue, which breached its equitable duty of care. Accordingly, they claimed that the value of the guarantee should be reduced by the same amount as the value wrongly lost from the sale. Since the guarantors argued that the value lost was more than £100,000, the guarantee would effectively be extinguished.

The court agreed with the principles of the claim, and held that:

• a creditor normally has no duty to realise any securities, but, if it does so, it owes a duty to the principal debtor to act prudently and with reasonable care so as to seek to obtain a proper price;
  
  
• a creditor also owes such a duty of care to guarantors - a guarantor's liability could (as with the principal debtor) be reduced or extinguished by the amount realised by the creditor; and
  
  
• that duty was not removed by the express terms of the guarantee in this case, although it stated that the guarantee:
  
  
• was unconditional and "all liabilities";
  
  
• was payable on demand; and
  
  
• would not be affected by the bank enforcing its security rights or doing, or failing to do, anything else.

 

1 Barclays Bank PLC V Kingston [2006] EWHC 533 (QB)

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