Guarantees not executed as deeds were enforceable as contracts instead
A guarantee can be executed as a contract or a deed. The guarantees executed by the parties in Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch) were prepared as deeds. But the guarantors were companies and the guarantees were signed by a single director, without being witnessed. And, because section 44(2) of the Companies Act 2006 provides that a document is validly executed by a company if it is signed on behalf of the company by two authorised signatories, or by a director of the company in the presence of a witness who attests the signature, the guarantors were able to argue that the documents had not been correctly executed as deeds – and that they were unenforceable.
However, section 43(1)(b) of the Companies Act 2006 enables a company to enter into a contract if the contract is signed “by a person acting under its authority, express or implied”. And since both the guarantees in question had been signed by the sole director of the companies, the lender argued that the documents were enforceable as contracts.
The companies drew the judge’s attention to the decision in R (on the application of Mercury Tax Group) v HMRC [2008] EWHC 2721 (Admin), ]2009] STC 743. They argued that it established that a defective deed cannot survive as a simple contract because Underhill J stated that the parties had intended the documents that they signed to be deeds “and their validity must be judged on that basis”. Consequently, the guarantees signed by the companies were to be treated as invalid deeds. But the judge disagreed, noting that Underhill J’s comment was not based on any cited authorities and that the case involved a challenge to the validity of search warrants issued under tax legislation – and did not concern the validity of a guarantee.
A guarantee can be executed as a contract or a deed. The guarantees executed by the parties in Signature Living Hotel Ltd v Sulyok [2020] EWHC 257 (Ch) were prepared as deeds. But the guarantors were companies and the guarantees were signed by a single director, without being witnessed. And, because section 44(2) of the Companies Act 2006 provides that a document is validly executed by a company if it is signed on behalf of the company by two authorised signatories, or by a director of the company in the presence of a witness who attests the signature, the guarantors were able to argue that the documents had not been correctly executed as deeds – and that they were unenforceable.
However, section 43(1)(b) of the Companies Act 2006 enables a company to enter into a contract if the contract is signed “by a person acting under its authority, express or implied”. And since both the guarantees in question had been signed by the sole director of the companies, the lender argued that the documents were enforceable as contracts.
The companies drew the judge’s attention to the decision in R (on the application of Mercury Tax Group) v HMRC [2008] EWHC 2721 (Admin), ]2009] STC 743. They argued that it established that a defective deed cannot survive as a simple contract because Underhill J stated that the parties had intended the documents that they signed to be deeds “and their validity must be judged on that basis”. Consequently, the guarantees signed by the companies were to be treated as invalid deeds. But the judge disagreed, noting that Underhill J’s comment was not based on any cited authorities and that the case involved a challenge to the validity of search warrants issued under tax legislation – and did not concern the validity of a guarantee.
The judge referred to the Law Commission’s Working Paper “The Execution of Deeds and Documents by or on behalf of Bodies Corporate”, published in 1998. It indicated that, unless a transaction requires a deed, a document that is expressed to be a deed, but was not executed with the necessary formality, can be enforced as a simple contract, if all the other elements of a contract are present and the document has been signed by a person or persons with authority to bind the company.
Furthermore, although the Law Commission’s Report on the “Electronic Execution of Documents” (Law Com 386) referred to the Mercury decision, the Law Commission did not resile from the position that it took in 1998. And it did not endorse Underhill J’s comment either, focusing instead on the need for a document to be “a discrete physical entity … at the moment of signing” and on whether section 1 of the Law of Property (Miscellaneous Provisions) Act 1989 requires signature and attestation to form part of the same physical document.
Therefore, if an otherwise complete guarantee was intended to be embodied in a deed, but the formalities were not met, the recipient of the guarantee may be able to enforce the agreement as a contract instead. And, because the guarantees in this case were signed by a director with authority to bind the companies concerned and were sufficiently supported by consideration, they were enforceable against the companies that provided them.
Allyson Colby, property law consultant
