Guarantees and the Anti-Discharge Clause

In the current economic climate, banks and financial institutions are tightening their lending requirements and in particular it is not uncommon to see parents and other third parties acting as a guarantor to assist a borrower in securing their lending.

The decision to act as a guarantor should not be taken lightly, as the guarantor will be responsible for repaying the borrower’s debt if the borrower is unable or unwilling to do so themselves.

Traditionally, if the borrower and lender have materially varied the underlying loan agreement without the guarantor’s consent, the guarantor would be released from liability. However, most guarantees typically contain an “anti-discharge” clause, which has the effect of preventing a guarantor from being released from liability in this very type of situation.

Cancian v Carters

In the case of Cancian v Carters [2021] NZCA 397, the Court of Appeal considered the liability of a guarantor in the context of a credit limit that was materially increased without the guarantor’s prior knowledge or consent.

In Cancian v Carters, Bella Vista Homes Ltd entered into a credit agreement application and terms of agreement for supply (“Agreement”) with Carters. At the same time, Mr Cancian, sole director of Bella Vista Homes, signed a deed of guarantee and indemnity (“Guarantee”) to personally guarantee payment of any outstanding monies owed by Bella Vista Homes pursuant to the Agreement.

The Agreement contained a clause that enabled Carters to “impose a credit limit on the Customer's account and alter the credit limit without notice”. The Guarantee included an anti-discharge clause, under which liability of the guarantor was not discharged by any variation or alteration in the Agreement.

Carters initially granted a credit limit to Bella Vista Homes of $50,000.00, but a week later Carters increased the limit to $800,000.00 without notifying Bella Vista Homes or Mr Cancian. Eventually Bella Vista Homes fell into liquidation and owed Carters over $1 million, resulting in Carters enforcing the personal guarantee from Mr Cancian.

The Court of Appeal held that the increase of the credit limit was legitimately exercised under the Agreement and not a variation. The Court also held that the change to the credit limit was captured by the anti-discharge clause and that Mr Cancian was liable for the debt owed as guarantor.

Key takeaway

When entering into any Agreement, it is imperative that the terms and conditions are thoroughly read and clearly understood. The Court of Appeal’s decision in Cancian v Carter demonstrates that despite a material variation, the Court will enforce an anti-discharge clause and find a guarantor liable.

Seek advice

If you are considering whether to provide a personal guarantee, please do not hesitate to contact us for legal advice from one of our experienced solicitors before agreeing to do so.