The mortgage was discharged but the disgruntled sole director of the borrower company caused the borrower to bring clawback proceedings against the lender. The borrower lost and was ordered to pay the lender’s costs on an indemnity basis as provided in the mortgage.
The borrower company had no funds to pay so the lender sued the guarantor (who was the sole director) to recover the costs. The director argued that his obligations under the guarantee had been discharged by the repayment of the debt by the borrower. He explained himself as follows:
At no time was it said to me that the Guarantee was intended by the Lender to extend to matters outside of the loan itself; the Proceedings were undertaken by Lindsay Lawrence & Associates and the counsel who acted in that matter on a speculative basis. Had there been any possibility that I was somehow liable to personally pay any adverse costs orders made in those proceedings, they would not have been undertaken.
The trial judge held:
I do not accept that, the guarantee would be limited to the fixed time when principal, interest, damages and other moneys were asserted to have been first paid, especially where there existed later disputation about whether that payment of principal, interest, damages and other moneys was “in full”.
The guarantor on appeal argued that he could not be bound by the indemnity costs order against the borrower as he was not a party to the clawback proceedings. The Court of Appeal disallowed this holding:
I would conclude that Mr Thomas should not be permitted, in these proceedings, to challenge the conclusion that the Facility Agreement entitled Balanced Securities to an indemnity costs order on the ground that to do so would constitute an abuse of the court’s processes in light of his close identification with Joelco in the clawback proceedings rather than on an estoppel.
Click here to read the full judgment.