Navigating Personal Guarantees

A Case Analysis of Lee v ATL (Australia) Pty Ltd [2023] NSWCA 327

Personal guarantees, often entered into by directors when a company borrows money or enters into a finance facility, are common contractual clauses that both secure a lender’s position as well as place the guarantor at risk of personal liability.

For lenders seeking to protect their entitlements under loan agreements, careful drafting of personal guarantees is essential to ensure their enforceability. Conversely, guarantors should be aware that the scope of liability of a guarantee, that is, the exact obligation or obligations guaranteed, is a question of careful contractual construction, and any variation in the principal agreement without the guarantor’s consent may constitute grounds to set aside the entire guarantee.

These questions of scope of liability, and variation of the guarantee (variation rule), were considered by the New South Wales Court of Appeal in the recent case of Lee v ATL (Australia) Pty Ltd [2023] NSWCA 327, in which the Court set aside a personal guarantee securing almost $17 million.

Key Facts

  • Mr Jefferey Tse Hung Lee was one of four co-guarantors for Gondon HLHS Epping Pty Ltd (Borrower) under a loan agreement with ATL (the respondent/lender).
  • On 13 March 2017, Mr Lee along with the other guarantors and the Borrower executed the loan agreement which was delivered at 4.27pm on 14 March 2017.
  • Later that same day, at 5.46pm, the Borrower’s solicitors agreed to a side letter which had been sent to them earlier in the day.
  • The terms of the side letter provided that interest under the facility would start to accrue as and when funds under the facility were transferred to Australia in Australian Dollars. This transfer had already occurred on 10 and 13 March 2017.
  • However, Mr Lee had not provided his agreement or consent to the side letter.
  • After the Borrower defaulted on repayment, on 20 September 2018, the lender sent a notice of demand to Mr Lee for payment of money owing under the loan agreement, including the interest accrued pursuant to the side letter.
  • Subsequently, the lender sued to enforce the guarantee and the primary judge rejected each of Mr Lee’s defences and found him liable for the principal sum and interest claimed under the side letter agreement, totalling $16,737,057.68.

Grounds of Appeal

Mr Lee appealed that judgement on the grounds that:

  1. the Borrower’s obligations in the loan agreement were amended by the side letter and were not within the scope of liability of the guarantee; or alternatively
  2. the alteration of the Borrower’s obligations to pay interest in the side letter was made without his consent, and accordingly the guarantee was discharged by operation of the variation rule referred to in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; 162 CLR 549 (Ankar).

NSW Court of Appeal Sets Aside Guarantee

Before considering the application of the variation rule, the court upheld Mr Lee’s appeal and set aside the decision at first instance to hold him liable under the guarantee on the basis that Mr Lee’s obligations were not within the scope of liability of the guarantee due to the amendments made by the side letter.

The Court was satisfied that there were five matters which favoured the view that the Borrower’s obligations under the loan agreement were altered/varied by the side letter and were outside the scope of Mr Lee’s guarantee. These were:

  • the side letter contained four explicit references to the loan agreement;
  • there were two express references in the side letter which were plainly intended by the parties to alter the Borrower’s obligations under the loan agreement, despite the argument that the side letter was a new and additional liability to the loan agreement;
  • the references to “money owing under this document” were to be read as the money owing under the loan agreement and as amended by the side letter, including the accrual of pre-drawn down interest;
  • there was no clause that referred to private agreement between the lender and Borrower, and therefore the entire agreement, including the side letter, was an agreement between all parties; and
  • the side letter varied the Borrower’s obligations and Mr Lee had not given his consent nor agreed to the side letter.

Application of the Variation Rule

Despite the scope of liability issue being dispositive of the appeal, the Court continued to consider the application of the variation rule, finding that it would not constitute grounds to successfully uphold the appeal.

The variation rule in Ankar states that any variation of the underlying contract between debtor and creditor which is not manifestly insubstantial or incapable of prejudicing the guarantor, if not consented to by the guarantor, will discharge the guarantor from his or her obligations under the contract of guarantee.

The variation rule was submitted by Mr Lee as an alternate ground for setting aside the guarantee. Despite the first ground of appeal resulting in the Court making its decision in Mr Lee’s favour, the Court provided an assessment of whether the variation rule argument would have been successful, deciding that the variation rule cannot encompass alterations to a contract guaranteed prior to the guarantor entering the contract of guarantee. The relevant question is not whether there has been a departure from the contract that the guarantor signed up to before the binding contract is made, but whether there is subsequent departure to which the guarantor has not consented.

Given that Mr Lee failed to consent to the amendments to the draft loan agreement (to include pre-drawdown interest), the relevant question to consider would be whether such conduct constituted inducement to enter the contract by material non-disclosure, but it does not allow Mr Lee to rely on the variation rule which applies to post-contractual departures without consent.

Nevertheless, the variation rule remains an important legal doctrine for guarantors in circumstances where, after the execution of a contract, another party may change the contractual obligations under the agreement.

Key Takeaways

Personal or director guarantees are standard in modern finance agreements. Individuals should be aware that by signing a guarantee, they are exposed to potential personal liability. However, in the event that a guarantee is enforced against a guarantor, it is equally important to note that there may be avenues to challenge or set aside the guarantee.

Important considerations include:

  1. the circumstances surrounding the entry into the contract that included the guarantee clause;
  2. whether or not the scope of the liability of the guarantee was clear at the time of entering the contract;
  3. whether or not the scope of liability has been amended by any subsequent conduct; and
  4. whether or not the principal agreement has been amended or departed from without the guarantor’s consent.

Such considerations are equally important for lenders as well as guarantors.


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This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.