Directors should beware, the credit limit you nominate on a trade application does not necessarily limit what you’re liable for as the guarantor.

In Crane Distribution v Yang, Crane Distribution (trading as Tradelink) (Tradelink) entered into a credit agreement with Steve Yang Construction Pty Ltd (the Company).  The director of the Company, Mr Yang, was identified as personal guarantor on the application.

Mr Yang nominated a credit limit of $150,000 applying to the agreement. However at the time his Company went into liquidation it owed Tradelink a sum well in excess of that amount.

One issue before the court was whether Mr Yang was liable to Tradelink as guarantor for the whole debt incurred by his Company.

Decision

The court looked to the construction of the agreement and  found that Mr Yang had concurrent liability with the Company for what was due to Tradelink by the Company pursuant to the terms and conditions of the agreement.

Mr Yang submitted that, while he should he be found personally liable for the debt, the debt should be capped at the credit limit under the agreement.

On this issue, Mr Yang submitted that under the agreement, the supplier had to notify the customer of any alteration in the credit limit.  The court, however, found that the requirement for notice does nothing more that ‘inform the customer after the event that Tradelink made a decision to the advantage of the customer by increasing its credit limit’ and that Tradelink was entitled to be paid for the goods it delivered.

In summary, the court was of the opinion that any other construction would:

[44] give an uncommercial result to interpret the Terms and Conditions so that a decision to, for example, increase the credit limit to meet a customer’s immediate need for supply could not be validly effected until notice of that decision had been given to the customer…

It is common for a directors to be asked to act as personal guarantor for a company’s debts, particularly in relation to credit accounts held with suppliers.

Takeaway

It is important for directors acting as guarantor to seek legal advice prior to entering an agreement and to always take care that:

• guarantees are reviewed and understood before they are signed;
• if a guarantee is to be limited, this should be clearly stated;
• they are aware of any clauses which extend their liability or provide security rights to a supplier that could affect their assets; and
• they know under what circumstances a guarantee will cease to operate.

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