Barclays Bank Plc v Kingston & Ors

A creditor who realises security for a principal debtor’s liabilities must take reasonable care to obtain a proper price. That equitable duty is owed both to the debtor and to a guarantor, whose liability is reduced by the amount that should have been realised. Contractual terms may modify that position, but clear words are required to exclude liability for a defective sale at an undervalue. A guarantee expressed as independent of other security, or as making the guarantor liable as principal debtor or indemnifier, does not necessarily achieve that result. The court must construe the guarantee as a whole and in its commercial context.

The Bank sought to enforce personal guarantees given by the defendants for the liabilities of Kingstonian Football Club Ltd. The guarantees were limited to £100,000 plus interest and costs. The Bank had received £300,000 from the administrators’ sale of the club’s property, but the defendants alleged that the property had been sold at an undervalue and that the Bank was responsible.

The parties agreed a preliminary issue: whether clauses 1, 3, 5 and 6 of the guarantee made the defendants liable despite the alleged undervalue sale. The issue was considered on the assumption that a proper sale would have extinguished the club’s liability.

1. Duty on realisation of security. A creditor is not generally obliged to realise security. If it does so, however, it must act prudently and take reasonable care to obtain a proper price. That duty is owed to the principal debtor and also to a guarantor, because the guarantor has an interest in the security and its realisation reduces the guaranteed liability. The court followed Cuckmere Brick Co v Mutual Finance [1971] Ch 949, Standard Chartered Bank v Walker [1982] 1 WLR 1410, American Express v Hurley [1985] 3 All ER 564 and Skipton Building Society v Stott [2000] 1 QB 261.
2. Burgess v Auger [1998] 2 BCLC 478 could not stand insofar as it had been treated as authority for the proposition that no such duty was owed to a guarantor until the guarantor had paid the creditor. Barclays Bank v Thienel (1978) 247 EG 385 was regarded as wrongly decided.
3. The guarantee had to be construed as a whole and as a commercial document. Its clauses did not clearly exclude the Bank’s liability for a sale at an undervalue. Clauses 1.1 and 2.1 merely referred to the customer’s liabilities; those liabilities were reduced by the sum received, or which should have been received, on a proper sale. Clause 3.1 concerned changes in lending, clause 3.2 concerned subrogation, and clause 5.1 did not remove the duty to realise security properly.
4. Clause 5.3 did not cover defective enforcement of security. Clause 6 made the defendants liable as indemnifiers if their liability as guarantors was reduced or discharged, but an indemnifier was subject to the same equitable reduction for an undervalue sale.
5. The preliminary issue was answered “No”: the guarantee did not make the defendants liable if the Bank had been responsible for the undervalue sale.