Legal Update: Maxted And Another v Investec Bank Plc [2017]

Summary

The High Court recently heard the case of Maxted and another v Investec Bank plc [2017], which looked at whether amending loan agreements multiple times would discharge a personal guarantee given by the directors of the borrower companies. It was held in this instance that even though the underlying agreements were amended several times, the guarantee was unaffected because the guarantee included a "consent to variation" or "indulgence" clause which meant that the guarantors had consented to amendments to the loan agreements of the type in question.

Background

A guarantee is a "secondary obligation" to perform an obligation of some other person (the "primary obligation") where they fail, or are unable, to do so. It is a common way for a lender to seek protection from the risk of a borrower defaulting on a debt by requiring a guarantor to repay an amount owed by the borrower if the borrower fails to pay it itself and are often given by directors of a borrower company.

Due to a guarantor's liability being dependent on the underlying primary obligation, the guarantee may be discharged if the contract containing the underlying obligation is materially amended. Accordingly, if the parties to the underlying contract (e.g. a lender and borrower) wish to amend that contract, they must do so in a way which does not accidentally discharge the guarantor from its liability under the guarantee.

To avoid this situation, it is common for a guarantee to include a "consent to variation" or "indulgence clause". This clause will state that the guarantor consents in advance to future amendments or variations to the underlying contract and, even if the underlying primary obligation is amended without the guarantor's consent, the guarantee will not fall away. The inclusion of such a clause is considered market practice but previous case law has suggested that this kind of clause is not always effective and may depend, amongst other matters, on the facts of the particular scenario.

Facts

Three group companies (the borrowers) entered into separate loan agreements with Investec Bank plc (the lender). The amount of one of the facilities was increased and the interest payable under all three loan agreements was guaranteed by Robert Maxted and John Lorimer (the guarantors) who were two of the borrowers' directors. The guarantee was capped at 450,000 euros (plus interests, costs and expenses) and included a clause stating that the guarantee would not be...