Enforceability of invalidly executed deeds

Tuesday 14th April, 2020

In Signature Living Hotels Ltd v Sulyok, the High Court found that two invalidly executed deeds of guarantee were enforceable in contract law.

A company (A) was a hotel and residential developer.

A sought funding for its development projects through investment loans from individuals which were made to separate legal entities owned by A and created for the purpose of each project and offered security by way of a corporate guarantee from A.

The applicant (“Signature”) was one of these borrower entities and received a loan from each of the respondent individuals.

A and Signature were associated companies and the same individual was recorded as the sole director of both companies.

The director executed the guarantees on behalf of A but failed to do so in the presence of a witness.

Neither loan was repaid by Signature and so statutory demands were served on A as guarantor.

A argued that the deeds of guarantee were not enforceable as they had not been witnessed, and so could not form the basis of any insolvency proceedings.

The respondents submitted that the guarantees were enforceable as a matter of contract law, despite the fact that they had not been duly executed in accordance with section 44 of the Companies Act 2006.

The Court rejected A’s arguments and found for the respondents:

  • The creditor could still enforce the agreement providing the agreement was supported by consideration.
  • Such consideration did not have to directly benefit the surety but could consist of some advantage conferred on the principal debtor by the creditor at the surety’s request, such as lending the debtor money.
  • The loan had been entered into as part and parcel of a series of interlinked transactions involving not only the entry by the borrower into the loan agreement, but also the entry by A into the guarantee and so the guarantee agreements were found to be sufficiently supported by consideration.
  • Had the guarantee not been given, the second respondent would have been entitled to call for the return of her money on the basis of a total failure of consideration.
  • The guarantees were enforceable against A, and so A was a debtor and each respondent was a creditor. On that basis, there was no reason to restrain presentation of any winding-up petitions founded on the statutory demands.

The decision supports the long-established principles of English contract law formation in requiring consideration to effect a validly binding contract. It also serves as a useful reminder of the importance of deeds being correctly executed to avoid the costly and time-consuming arguments over enforceability when a dispute arises.


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Articles by Sam Swann