Consent of guarantor implied when he agreed a variation as director

When a sole director and shareholder agreed a variation on the company's behalf, his consent as personal guarantor was implied.

In this case¹, a company advanced two loans to another company, which gave second and third mortgages as security. The sole director and shareholder of the borrower personally guaranteed the loans.

The guarantor subsequently sold the security property, and the first mortgage was discharged. The guarantor's understanding was that the price reflected the amounts owing under the outstanding loans and that the purchaser would repay them, discharging the second and third mortgages. The purchaser argued that it had not agreed to take over the loans.

When the lender demanded repayment of its loans, the borrower went into liquidation and the lender pursued the guarantor for payment.

The District Court determined that the main issue was whether it was agreed that the purchaser would take over the loans, and decided in the lender's favour that it was not.

The High Court considered whether variations to the principal contract (including release of the unregistered second and third mortgages, transfer of the security property to the purchaser and extending the date for repayment of the loans) effectively discharged the guarantor's liability.

The guarantor had clearly agreed to the variations, but in his capacity as director and shareholder of the borrower. The decision was that, while the roles of director and guarantor are legally distinct, consent to the variation could be implied from the guarantor's knowledge of, and involvement in, the transaction.

¹ Liguori v Richelieu Investments Limited , High Court, Auckland, CIV 2007-404-492, 2 November 2007

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