The importance of ensuring credit agreements and guarantees are accurate, legally effective and retained securely cannot be stressed enough. The credit agreement (and guarantee) form the basis of the legal relationship between a business and its customers. Some time after the agreements are formed (often years after), businesses may need to rely on these documents to recover outstanding debts.
An example of how bad documentation can undermine a recovery action is illustrated in a recent High Court decision in Penguin Books (NZ) Limited v Todd (unreported).
Penguin was trying to recovery over $100,000 from a customer, Bilgola. After Bilgola went into receivership, Penguin sued Bilgola's directors under a guarantee. The directors successfully defended Penguin's application for summary judgment for two key reasons:
the guarantee did not identify the names of the contracting parties. There was no identification of Penguin or the names of the guarantors (although the guarantor's signatures were on the document). The guarantee also failed to clearly identify or set out its relationship to the credit agreement between Penguin and Bilgola. The Court said that without those matters the document did not create a valid guarantee.
Penguin was unable to produce the original copy of the guarantee or credit agreement and relied on a photostat copy. The High Court said "it is fundamental the plaintiff be able to identify and produce to the Court the original contractual documents on which it must rely". This was especially so as there was a question about the validity of the document.
The messages from this case are clear. Businesses must be vigilant about ensuring applications, credit agreements, and guarantees are completed fully and properly so they are legally effective. The original documents must also be carefully and securely stored so that they can be produced to the Court in later recovery actions. Failure to prepare and keep proper documentation will increase recovery costs and the likelihood of unsuccessful claims for outstanding debts.
This article is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this article.
Copyright Phillips Fox, 2001
Contact - Dean Knight: dean.knight@phillipsfox.com
December, 2001
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