Personal guarantees are commonly provided by business owners and company directors to secure finance from banks and other lenders. In this guide, we’ll explain the reasons why a personal guarantee may be unenforceable and look at how circumstances outside of the contract may affect its legitimacy.
What is a Personal Guarantee?
Banks and other lenders often ask for one or more company directors to give a personal guarantee before they are willing to provide commercial finance. Once a personal guarantee has been signed, it makes the director(s) in question secondarily responsible for the repayment of the loan.
If the business cannot afford to repay the loan, the personal guarantee will be called in and the directors will be responsible for making the repayment personally. Potentially, that could put assets such as savings, vehicles and even homes at risk.
A personal guarantee is a very serious commercial document that should be considered very carefully before it’s signed. The terms of personal guarantees can differ and be:
- Capped at a certain amount
- Limited in time
- Subject to specific methods of notice
- Subject to other limitations
If more than one director provides a personal guarantee for a loan, it is not necessarily the case that the lender will seek to retrieve the liability from the directors equally. Instead, it is usually the director who owns the highest value assets or is most financially able to pay that will be targeted.
Why do Banks Require a Personal Guarantee?
Banks will often ask for a personal guarantee as it reduces their risk and provides them with another way to recover their money. However, it’s not just the banks that commonly ask for personal guarantees. Personal guarantees are commonly required in the following finance arrangements:
- Invoice financing
- Business loans from non-bank lenders
- Property leases
- Trade supply deals
- Asset leasing agreements
How Enforceable is a Personal Guarantee?
Personal guarantees are usually enforceable. The typical route would be for the lender to take the guarantor to court to request the enforcement of a judgement against their personal assets.
Once a lender takes legal action, the enforcement of a personal guarantee can be a quick process. However, it’s important to note that some documents are called guarantees when they are not, which could make them difficult to enforce. When deciding whether guarantees are enforceable, the courts will take into account the following factors:
- Proper interpretation – It’s whether the right words have been used in the relevant clauses that counts, not simply what the document is called.
- Substance over form – Just because the word ‘guarantee’ has been used, that does not make it a guarantee.
- In writing – The guarantee must be evidenced in writing to be enforceable.
- Signed – The document must be signed by the guarantor or their authorised agent. Their name can be written or printed.
- Secondary liability – The document must establish that the guarantor has secondary liability for the debt.
- Consideration – Like any contract, there must be evidence of offer, acceptance, consideration, intention and capacity for the guarantee to be enforceable.
How Long are Personal Guarantees Enforceable for?
In the absence of any clauses saying otherwise, the guarantor is liable for the debt until the primary debtor, i.e. the business, is released from the debt by the creditor, usually by repaying it in full. If the business remains liable for the debt, so does the guarantor. Even if you were to leave the business, you would remain liable unless the personal guarantee was transferred to another director,
There may be terms in the contract that cap the period in which legal proceedings can be taken against the guarantor to recover the debt. This is known as a ‘limitation period’. The limitation period is typically six years for most debt recovery cases but up to 12 years where the personal guarantee is regarded as a deed.
When are Personal Guarantees Unenforceable?
Rather than the wording of the document, it’s often external circumstances that make personal guarantees unenforceable. A personal guarantee may not be enforceable if:
- The lender did not provide you with all the facts, which affected your decision to sign the guarantee. For example, you may have been led to believe that another director was a co-guarantor when they weren’t.
- You were misled by the creditor when signing the guarantee, an act of fraud has taken place or you signed it under duress.
- The finance facility changed significantly from when you signed the guarantee to when the creditor made their claim and you had not been informed about the changes.
- There’s a term in the contract that you think is unfair under the Unfair Terms in Consumer Contracts Regulations (1999). Only the court can determine whether a term is unfair. However, the creditor may not want to incur the expense of legal proceedings if it thinks it may lose and choose to settle or not enforce the guarantee instead.
Is a Personal Guarantee Enforceable When a Director Resigns?
A personal guarantee is likely to remain in place even if you resign as a company director or the business ceases trading and is wound up. If you want to resign, you should take steps to deal with the guarantee at the point of your resignation. You could do that by:
- Asking the creditor or other parties to the agreement to release you from the guarantee
- Requesting that any incoming directors sign a personal guarantee in your place.
A creditor is under no obligation to release you from a personal guarantee if you resign, but if the company is in good financial health and is meeting the terms of the agreement, the lender may be willing to consider it.
Can you get out of a Personal Guarantee?
If the guarantee is enforceable based on the points described in this guide, unfortunately, there is no way to get out of a personal guarantee. However, there are some steps you can take to protect yourself from the potentially damaging consequences of the guarantee being called in.
- Take Out Personal Guarantee Insurance
Personal guarantee insurance provides cover for company directors whose personal assets could be at risk if the business is unable to repay a creditor. The insurance can cover new or existing finance agreements and typically covers around 70 percent of the liability. Unfortunately, this type of insurance can be quite expensive. That’s because if you’re taking out insurance, you’re probably worried about the company’s ability to repay the loan.
- Renegotiate the deal
If the company is performing well and has made repayments on the finance agreement without any problems, you may be able to renegotiate the deal with the creditor without the requirement for a personal guarantee. For example, the creditor may be open to putting a limited period of time on the guarantee or only applying the guarantee to a proportion of the loan. Renegotiating this kind of deal may be difficult but it’s well worth a try.
- Enter into an Individual Voluntary Arrangement (IVA)
If a personal guarantee is called in, it may be possible to enter into a formal agreement called an IVA that will give you more time to repay the debt. The IVA could spread the repayments over 3-5 years and even write off some of the liability. However, an IVA will have a serious impact on your credit score and will make it difficult to obtain credit in the future.
Are you Liable for a Business Debt via a Personal Guarantee?
At Company Debt, we provide confidential and professional advice if you’re worried about a personal guarantee or a guarantee that you’ve signed has been called in. We’ll consider all the potential routes for a challenge so you can make an informed decision. Call 0808 239 8934 to talk to one of our personal guarantee specialists today.