What is a personal guarantee?
A personal guarantee is a contractual promise. It can be given by a director, business associate or family member in respect of the obligations of another party to do or pay something. The personal guarantee can be called upon if that other party defaults on its obligations.
You could be asked to sign a personal guarantee in a number of situations. For example, where a director/shareholder guarantees a company’s liability to repay a loan or where a person guarantees a tenant’s liability to pay rent to the landlord.
If you are asked to give a personal guarantee, it’s vitally important to remember that you are pledging your personal assets and wealth. You should therefore have a full understanding of the implications of agreeing to sign up to one and how it could financially affect you if it later gets called in.
It is standard practice for lenders such as banks to require directors to provide it with a legal charge by way of security over his or her home in return for providing a loan to a company. If the company then defaults on its obligations, the bank is entitled to enforce the legal charge, which could mean the home will have to be sold to cover its losses. If the bank does not have security, it can still enforce the guarantee by issuing legal proceedings at Court, obtaining judgment and then enforcing that judgment. If the director does not have sufficient money to pay the debt, insolvency proceedings could be started. The bank could serve a Statutory Demand on the director and eventually apply to make him/her bankrupt. This would have a detrimental effect on the directors’ credit rating for the next 6 years.
What to look out for
There are several points a director should bear in mind if he or she is asked to sign a personal guarantee: –
- Is the personal guarantee even necessary? Can the bank be persuaded that the company is able to provide sufficient security?
- Seek to cap the amount the director is being asked to pay. If the personal guarantee has an all monies clause, the director has a liability for all and any future sums advanced by the bank together with accrued interest.
- A personal guarantee given to a bank will often include an indemnity. Beware, the indemnity is a separate obligation unaffected by anything the “real” borrower does. It allows the bank to enforce the personal guarantee against the director without first enforcing against the company.
- If there are several directors “jointly and severally” giving the same personal guarantee, the bank is entitled to claim the entire outstanding amount from any single guarantor.
Take advice early
If you are being asked to sign a personal guarantee you need to be satisfied it does not contain onerous conditions or if a lender is trying to enforce a guarantee against you, you should be aware of the full extent of the risks and your financial obligations. If litigation or insolvency proceedings are being threatened, you certainly should not ignore the seriousness of this. We regularly act for clients who find themselves in such situations. Give one of our team a call on 0121 306 0170 to see how we can help.