Maintaining The Validity Of Guarantees

In Bank of Scotland Plc v (1) Constantine Makris (2)

Ben O'Sullivan (2009) (Ch D), the Court considered the

validity of a guarantee in light of a variation to the underlying

facility agreement between the bank and the borrower company in the

form of a reduction in the amount of the facility.

Bank of Scotland Plc (the "Bank") sought to recover a

sum due under a guarantee provided in relation to a facility

agreement between the Bank and the borrower company after the

borrower company entered into creditors' voluntary

liquidation.

Background

The borrower company was the vehicle for a joint business

venture between three men, Mr Constantine Makris, Mr Ben

O'Sullivan and Mr Vincenzo Spano. The facility agreement

initially provided for an overdraft facility for the company of up

to £250,000. The advance of the overdraft facility was

conditional on the provision of security as follows:

1 A fixed and floating charge, and a legal charge over the

borrower company's leasehold interest in its premises.

2 A guarantee by Mr Spano in the sum of £250,000 supported

by a legal charge over his home (the "Property").

3 An unsecured guarantee limited to £50,000 from Mr Makris

and Mr O'Sullivan expressed to be joint and several.

The facility agreement was signed on behalf of the company by Mr

Spano and Mr Makris. The guarantee for £50,000 was duly

signed by Mr Makris and Mr O'Sullivan.

A complication arose in respect of Mr Spano's guarantee. The

Bank discovered that Mr Spano was not the sole owner of the

Property. It was in fact registered in the joint names of him and

his mother. Although Mr Spano's mother joined with her son in

executing the guarantee and charge in favour of the Bank, the Bank

regarded the security as weakened by the mother's involvement.

As a result, the Bank was only prepared to advance an overdraft

facility to the company of up to £230,000. A revised facility

agreement for this amount was issued by the Bank and the facility

agreement was signed on behalf of the company, as before, by Mr

Spano and Mr Makris. These two defendants subsequently disputed

their liability to meet the guarantee, on separate grounds, and a

dispute arose in respect of whether the guarantee was valid.

Variation of principal contract

Mr Makris argued that the reduction of the overdraft facility

from £250,000 to £230,000 was a material variation of

the principal contract (between the Bank and the borrower company)

and thus discharged the guarantee.

The Court accepted...