What is an Unenforceable Personal Guarantee?

Many directors find that the personal guarantee is called in when their business gets into financial difficulties.  This causes great stress and anxiety, and we are commonly asked to advise on what to do and whether there are any possible reasons the personal guarantee may not be enforceable.

If you have given a personal guarantee and your business is insolvent, it can be tempting to try and avoid the guarantee being called in by trying to trade out of the situation or take other risks, such as selling company assets at an undervalue. This is only likely to make your situation worse, unfortunately.

We are experienced business advisors and Insolvency Practitioners. We regularly advise small business owners who have given personal guarantees to support their business and now face business insolvency with the threat of the guarantee being enforced. Please do get in contact if you are facing this situation.

In this guide, we’ll explain the reasons why a personal guarantee may be unenforceable.

When are Personal Guarantees Unenforceable?     

A personal guarantee may be unenforceable 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 took place, or you signed it under duress. 
• 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. 

As a starting point, most lenders now insist that before signing a personal guarantee, the person agreeing to give it must receive independent legal advice. If you received legal advice, generally, your chances of successfully challenging a personal guarantee are less.

If more than one director provides a personal guarantee for a loan, usually there will be joint and several liabilities, which means the lender can enforce against both or choose to only enforce against one It is usually the director who owns the highest value assets or is most financially able to pay that will be targeted.

How Enforceable is a Personal Guarantee?

Personal guarantees are usually enforceable. The typical route would be for the lender to demand repayment and then if payment is not received, to take legal action, to seek a court judgment and then enforce the personal guarantee.

This is not a quick process and may mean there is an opportunity to negotiate, especially if there aren’t obvious assets such as equity in a house to enforce against.

Key things to check that impact whether the personal guarantee is likely to be enforceable include

• 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.
• 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?

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 or the lender agreed to cancel it. Some personal guarantees also have clauses which entitle the guarantor to cancel the guarantee under set circumstances. You should check this in the documents.

The contract may have terms 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. 

Is a Personal Guarantee Enforceable If a Director Resigns? 

Resigning as a director does not impact the personal guarantee. A personal guarantee will 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 practical steps you can take including:- 

1. Check if you took out  Personal Guarantee Insurance – The insurance can cover new or existing finance agreements and typically covers around 70 per cent of the liability.
2. Negotiate – Enforcing a guarantee through the courts and thereafter against assets is time-consuming and expensive, and the lender may not always be sure that you have sufficient assets to pay the amount owed. Sometimes, you can negotiate a lower amount or time to pay. Before doing so, you should have a clear plan and strategy.
3. 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.