Close Brothers Ltd v Pearce

This is a claim by the claimant bank, Close Brothers Limited (“the Bank”), against Mr Michael Pearce on personal guarantees which he gave on 9 July 2004 and 29 March 2005. By these guarantees, Mr Pearce guaranteed lending by the Bank to a company in which he had a substantial interest, namely Air Touring Limited (“ATL”). The guarantees were limited to one quarter of the company’s indebtedness. The claim relates to the balance due under a loan agreement dated 3 April 2008, the sum in question being agreed at £49,780 (including the expenses of realisation).

Mr Pearce advances two defences. First, he says that the guarantees were revoked by him in respect of future borrowing during the course of a telephone conversation with the Bank on 10 October 2006. Second, he says that the loan fell outside the scope of the 2005 guarantee which covered the joint and several liabilities of ATL and a Delaware company called ATL Aircraft Inc (“AAI”). Since the loan was made to ATL and a different Delaware company called Air Touring Inc (“ATI”), he says that the loan does not fall within the scope of the 2005 guarantee. In view of that defence, shortly before trial the Bank made demand under the 2004 guarantee the terms of which Mr Pearce accepts are wide enough to cover the liability, and amended its claim accordingly.

The second point is purely a question of construction of the instrument in question. The revocation point, however, must be determined on the evidence. Before setting out the facts, I begin by explaining the principle so far as presently relevant. A guarantee may state its duration, but typically bank guarantee forms are (and were in this case) in the form of “continuing” guarantees. The guarantor’s liability continues until brought to an end. Depending on the terms of the instrument, the guarantor may unilaterally revoke the guarantee: Silverburn Finance (UK) Ltd v Salt [2001] 2 All ER (Comm) 438 at [28] - [29], Mummery LJ, and [36] Rix LJ. Such revocation may be oral. The Statute of Frauds stipulates that no action shall be brought in the absence of a signed written record of the contract of guarantee, but this does not render an oral revocation ineffective or prevent it from being relied upon by way of a defence: In re a Debtor (517 of 1991), The Times, 25 November 1991, Ferris J; Andrews & Millett, Law of Guarantees (5^th Edn) p.55. The absence of writing is however significant from an evidential point of view, since the case law shows that such points may be raised by defaulting guarantors without any good factual basis. Finally, a revocation can be unilateral, but it must be clear and explicit: Dickson v Royal Bank of Canada (1975) 66 D.L.R. (3d) 242, Sup Ct of Canada. A request for a release by a guarantor is not the same as a revocation, and to be binding, must be agreed by the other party.

At the trial, evidence was given by Mr Richard Kearsey, who is Managing Director of Close Aviation Finance which is one of the business arms of the claimant bank, and who is an experienced and senior banker (a point as regards the extent of his authority was not pursued at trial). The other witness was the defendant, Mr Pearce, who has spent his working life in the aviation business. Both were good witnesses. The facts as I find them are as follows.

Mr Pearce had a substantial interest in ATL which (so far as material) specialised in the sale of light aircraft. ATL had distribution agreements with various manufacturers, including a French company called SOCATA. Sometimes, ATL would take an aircraft from the buyer in part exchange. That was how it came to do business with the Bank, which was not its banker for other purposes. The Bank extended finance to ATL in respect of the aircraft being bought in part exchange. The finance was short term (with a maximum duration of one year) secured by a mortgage over the aircraft in question, and a guarantee by Mr Pearce. There were a number of such transactions. It was in that context that the 2004 and 2005 guarantees (the only ones which are presently relevant) were given.

It is now necessary to explain how ATI came into the picture. Aircraft which are registered in the United States are required by US aviation regulations to have a US based registered owner. ATL used Delaware trust companies for this purpose, originally the company called ATL Aircraft Inc (in other words AAI). In 2006, this company was discontinued and the new Delaware company called Air Touring Inc (in other words ATI) took its place. The legal position is illustrated by the 2008 loan agreement, which shows ATI as the owner of the aircraft in question, and ATL as the beneficiary.

The transactions between the parties were typically small, in the hundreds of thousands of pounds. However in 2006, Mr Pearce succeeded in floating the business in the secondary market. A company called Air Touring Group Plc (“ATG”) was set up, becoming sole owner of the shares of ATL. ATG began trading on 17 October 2006. The introduction of new capital into the business enabled the transaction size of the business to increase. Again, this is illustrated by the 2008 loan agreement which involved a substantial advance of US$1,450,000 in respect of a US registered aircraft namely a SOCATA TBM 700. It was the flotation of the business that gives rise to the factual issue that I have to determine. Mr Pearce says, and I accept that, that he did not consider new transactions to be covered by the existing guarantees which he had given, and would not have entered into them if he thought they had been. It is common ground that he and Mr Kearsey spoke about the subject on the phone on 10 October 2006. The dispute is to precisely what they discussed or agreed that day.

According to Mr Pearce’s witness statement, he purposefully telephoned Mr Kearsey and advised him of the flotation of ATG and told him he no longer thought it was appropriate that he should guarantee future loans. According to him, Mr Kearsey agreed that that was not appropriate and that these would not be required in the future. In cross-examination, he said that there were three loan agreements in force on 10 October 2006, and he was content for them to continue to be covered. He said that the Bank was relaxed at the time because the company was in good shape. It was put to him that he was looking for Mr Kearsey’s consent. He said that he was saying that going forward there was a change in the way the company would be doing business. Asked whether he was seeking approval of his request, he said “exactly”. When it was put to him that he did not suggest in terms that he would refuse to cover future lending, he said that was not the tone of conversation. When put to him that Mr Kearsey did not give his consent, he said that Mr Kearsey had done so, saying that the guarantees were no longer required. In other words, his evidence was that Mr Kearsey himself agreed to the revocation of the guarantees. He said that he took Mr Kearsey at his word, and wrote a note of the conversation on a pad that he had got from the firm of corporate advisers (St Helen’s Capital) which was acting in relation to the flotation.

Mr Kearsey’s witness statement was to the effect that Mr Pearce made reference to the guarantee on various occasions when they spoke on the telephone including on 10 October 2006. Mr Pearce told him that his view was since he would be a director of a listed company, it was inappropriate for him to give a personal guarantee. Whilst he indicated that he might have been prepared to consider the issue in the future, Mr Kearsey says he did not go any further than that, and certainly did not agree that any guarantee had been revoked or discharged. He says that he recalls that the defendant accepted this position. In cross-examination, he acknowledged that he found it difficult to remember much about the conversations, because they were not from his perspective important discussions. He believed that he told Mr Pearce that he would not agree to revocation, but would reconsider depending on how the company did after flotation. The conversations were, as he put it, short and sweet, and he could not recall Mr Pearce saying that he was not prepared to guarantee future lending. He thought it was a only request. Mr Kearsey in accordance with his invariable practice took a note of the conversation in his daybook. This note shows that the two men discussed the forthcoming listing of ATG. The notes are relatively brief. There is no mention of any discussion as regards guarantees. Mr Kearsey explained that this was because the subject was only mentioned in passing, and was not a matter of substance.

Mr Pearce says that he also produced a note of the conversation. This is potentially important evidence, though the note has been a matter of controversy so far as the Bank is concerned. The document produced by Mr Pearce is on the paper of St Helen’s Capital, and reads as follows:

“10 Oct

Called Kearsey – informed him that public offering of ATG Plc had raised over £1m and wd start trading on PLUS 17/10/06

Put it to him that inappropriate for me to hold PG’s for publicly quoted Group with public shareholders – he said these wd no longer be required.”

It is plain that the Bank has suspicions about the provenance of this note, which emerged for the first time on a summary judgment application. However Mr Steven Thompson, counsel for the Bank, who has conducted this case with great skill on its behalf, stopped short of suggesting in cross-examination that it was a fabrication. In my judgment, he was right to do so. I regard Mr Pearce as an honest witness, and I accept his explanation that following the conversation, he put the note with his personal file relating to the flotation, and gave it to his solicitors in the course of the litigation when asked to produce all relevant documents.

In fact, I am satisfied that both men gave an honest account of their recollection of the conversation. The onus of proof is on the defendant as regards the alleged revocation, and whilst the note provides support for his case, it is perfectly possible that it recorded what Mr Pearce thought had been said, rather than what had actually happened. It was not followed up by a written communication to Mr Kearsey which would, as Mr Thompson pointed out, have flushed out the position one way or the other. In those circumstances, in determining what was said in this conversation, I consider that it is necessary to have regard to other evidence. In that regard, the following appears to me to be relevant.

The background is as follows. Prior to the conversation on 10 October 2006, Mr Pearce had given a number of personal guarantees as securities for loans made by the Bank. Both the loan documents and the Bank’s internal credit authorisation show him as a guarantor. The practice changed in respect of the four loans which the Bank made after 2006. None of the loan documents identified Mr Pearce as guarantor, nor was he mentioned in the Bank’s internal credit authorisation documentation for the loans in question.

This is demonstrated clearly by going through the credit authorisation documents. These consist of a simple one page form, initialled by one or more officers of the Bank. In the first post-October 2006 credit authorisation dated 7 June 2007, it is significant to note that Mr Pearce’s name as guarantor was inserted but then crossed out, and the name of the parent company (ATG Plc) was substituted. This in due course led to a very substantial loan of US$2,160,000 on 16 July 2007.

As regards the loan which is the subject matter of the claim, the credit authorisation appears to have post-dated the loan carrying the date 25 April 2008. Under the heading “Guarantors”, again significantly, appear the words “N/A”. The loan agreements are in standard form and have a space in the schedule for the name of the guarantor and indemnifier. In the case of this loan, one sees “n/a”. In fact, so far as the documentation is concerned, two of the four loans were guaranteed by ATG Plc, but unlike the loans prior to the conversation on 10 October 2006, none were stated to be guaranteed by Mr Pearce. Mr Kearsey explained this in terms of administrative error, but it appears to me to be explained by and consistent with a change in practice following the conversation of 10 October 2006 with Mr Pearce and the subsequent flotation.

Both parties place reliance on an email from Mr Kearsey to Mr Pearce sent on 11 November 2008 (some two years therefore after the conversation). By this time, Mr Pearce’s business was running into difficulties, a fact he attributed to the collapse of Lehman Brothers in September 2008, and the general chill that this inflicted on businesses such as his. He says that the company’s bank (which as I have said was not the claimant bank which was only concerned with these asset finance transactions) had become reluctant to extend further credit. Be that as it may, the company was behind in payments due to the Bank on a loan entered into on 28 July 2008.

Mr Kearsey gave the company an extension for the repayment of arrears, saying in the email, “part of the reason for agreeing this extension is your offer, as per our last conversation, that you would personally guarantee the arrears. According to our files the personal guarantee which you provided dated 29 March 2005 remains valid. Whilst we held discussions about it following the flotation of the company we do not appear to have revoked or restricted it. A copy is attached for your records.”

Mr Pearce did not challenge this assertion by way of a response to Mr Kearsey at the time. However, he had what appeared to me to be a convincing explanation of this omission in the circumstances. The transaction related to a customer in the Isle of Man to whom the company had sold an aircraft before, and whom he trusted to provide the funds with which to repay the Bank shortly afterwards. The funds did in fact arrive a few days later, and the Bank was duly repaid in respect of this loan.

Further, it is to be noted that the email goes on to say, “on the basis that you accept in writing, by no later than close of business tomorrow, that the attached personal guarantee is currently valid and binding we will restrict any recovery (as opposed to claim) to the amount of the arrears from time to time”. There was no such acceptance by Mr Pearce. As I have said, both sides seek to draw support from this email, but whilst in no sense conclusive, as Mr Giles Wheeler, counsel for the defendant put it, the email does show at least some doubt in the Bank’s mind as to the currency of the guarantee, and therefore some support for the defendant’s case.

At this point, it is convenient to bring the chronological account up to date. The loan which is the subject matter of this claim was made as I have said on 3 April 2008. It was due to be repaid a year later on 3 April 2009. By now, Mr Pearce was trying to raise funds in Abu Dhabi to rescue the business. The plane which was the subject of the April 2008 loan was by now also in Abu Dhabi, though flight outside Europe was precluded under the terms of the mortgage. Mr Pearce was hopeful of finding a buyer in Abu Dhabi, but says that the sale was scuppered by the Bank requiring the return of the aircraft to England. This is not an issue that affects liability, but since the point has been raised, I should say that I reject the criticism that is made of Mr Kearsey in that regard. It was imperative from the Bank’s perspective that the plane be returned forthwith, and unsurprisingly he threatened (and would no doubt have been granted) an injunction requiring its return. In the event, he gave Mr Pearce a few extra days to try to sell the aircraft, and when the sale did not materialise, Mr Pearce had it returned to England, where it was sold by the Bank under the provisions of the mortgage.

From this time on, unfortunately the parties have remained in dispute. The claimant relies upon the fact that Mr Pearce did not at that point in time produce his note of the conversation on 10 October 2006. On the other hand, Mr Kearsey’s notes show that a conversation took place between them on 22 April 2009 in which he asked Mr Pearce whether he was going to accept liability. The note says: “he said not valid cos our conversation. plc g’ee”. What this shows is that Mr Pearce was raising at this early stage in the dispute the defence that he has relied upon since then, albeit the note was not produced until later.

I now come to my findings as to what was said in the conversation that admittedly took place on 10 October 2006. The claimant submits that the evidence shows that Mr Pearce understood that he was making a request for the guarantees to be released, and a request only. On that basis, it is submitted that what matters is what happened next, that is, whether Mr Kearsey did or did not agree to the request. In other words, the Bank submits that the conversation was predicated on Mr Pearce wanting to get the Bank’s agreement to release the guarantees. That, it is pointed out, is how the case was initially pleaded. The Bank submits that as an experienced business man, it is not credible that Mr Pearce would have relied upon Mr Kearsey’s word, and that he would have obtained express confirmation had an agreement been reached as he asserts.

The dispute is a narrow one, but in my opinion the surrounding evidence that I have described above is both inconsistent with the Bank’s case, and supportive of that of Mr Pearce. The phrase “n/a” as regards the April 2008 loan in both the loan agreement and in the credit authorisation plainly shows that the Bank considered that the loan was not guaranteed. On that basis, the parties entered into the transaction. I do not accept that this was an administrative oversight, because the failure to identify Mr Pearce as guarantor is consistent with the three other loans entered into after the disputed conversation. In the case of the first, as I have said, his name was actually deleted on the credit authorisation form as guarantor. In the light of this evidence, on balance, I accept Mr Pearce’s evidence as to what was said in the conversation. This is not in any way to doubt Mr Kearsey’s word as to his recollection. However, the Bank’s primary security was the aircraft, and Mr Pearce’s personal guarantee may not have appeared so important in view of the intending flotation. But it was plainly a very important matter for Mr Pearce. At all events, I accept his evidence that in the conversation of 10 October 2006 he made it sufficiently clear to Mr Kearsey that his existing guarantees would not cover future loans to amount to a revocation in this regard, and that Mr Kearsey indicated his assent. I accept that the note he produced reflects the conversation between them in that regard. There is no dispute that on the basis of those findings, the Bank’s claim on both the 2004 and 2005 guarantees must fail.

In those circumstances, I can deal briefly with Mr Pearce’s other defence. It applies only to the 2005 guarantee. The point taken is as follows. The guarantee extends to obligations of the “Principal Debtor”. The Principal Debtor is defined in the schedule to the guarantee as follows: “The Principal Debtor jointly and severally”. There then appear the names of two companies, namely ATL and AAI. As I have explained, AAI was the Delaware trust company in whose name US aircraft were registered until June 2006 when ATI, another Delaware trust company, took over exactly the same role. On a strict construction, the only liabilities guaranteed, it is submitted, are those of ATL and AAI jointly and severally. Since the loan agreement of 3 April 2008 was entered into by ATL and ATI as borrowers, the 2005 guarantee does not cover this loan.

I would accept that in some circumstances, such an argument might have force. Obviously, a guarantor is liable, and is only liable, to the extent of the liabilities assumed under the guarantee, and it would in principle be perfectly possible for these to be defined in terms that extended only to obligations incurred by two debtors jointly and severally. But the present case is very different. The Delaware trust company was included solely as the holding company for American registered aircraft. It role, as the Bank says, was merely facilitative, and it had no other role. In my judgment, the fact that by the time of the 2008 loan AAI had dropped out of the picture to be replaced by ATI in precisely the same role makes no difference to the guarantor’s liability. Had the guarantee still been in force, in my judgment it would have extended to cover this loan.

However, in the circumstances the second point does not arise, and the claim is dismissed. I am grateful to both parties for their assistance, and will hear counsel as to any consequential matters.