You’ve been asked to sign a personal guarantee – what do you need to worry about?

May 20, 2022

 

By Stephen Thompson

What is a personal guarantee?

A personal guarantee (or “PG”) is a promise by one person (guarantor) to make good the liability of another party (borrower) if they fail to pay it themselves.

What are typical examples of PGs?

Typical examples of guarantees include:

  • A shareholder or director being asked to provide a PG in respect of the debts of their company

  • A company in a group being asked to provide a “cross company guarantee” in respect of the liabilities of another company within the group

Must the lender attempt to try to make a recovery against a borrower before they can enforce a PG?

Most standard forms of PG do not require the lender to attempt to make a recovery from the borrower. Typically, lenders will commence action against the borrower and also the guarantor at the same time if the borrower has defaulted.

What is the extent of the liability of a guarantor under a guarantee?

The precise extent of the liability of the guarantor under a PG will depend on the nature of the guarantee. It may be fixed by reference to a specific sum or alternatively “all monies”, meaning that it will cover all liabilities of the borrower to the lender. The latter type of PG is used to guarantee overdrafts. In addition, the guarantor is usually liable for the lender’s legal costs of taking action under the PG, together with interest on the sum being claim.

Can I refuse to sign a guarantee?

You are not generally under a legal obligation to sign a PG. However, the lender may refuse to provide the proposed lending if you do not, unless you are able to provide alternative security.

Are there any defences to claims to enforce a guarantee?

Unless you are able to argue that either there was “undue influence” exerted on you to provide the guarantee, or alternatively you did not know what you were signing, there are very few defences available to claims to enforce a guarantee.

If legal proceedings are taken to enforce a guarantee and a court judgment is obtained, are your personal assets at risk?

Even if the PG is not “secured” e.g. by a legal charge over a property, the guarantor’s personal assets will be at risk once judgment is obtained.

Does the guarantee “expire” at any point, for example once the underlying borrowing has been repaid?

Standard form bank guarantees are normally stated to be “continuing security”, so do not automatically terminate or expire. It is therefore important to ensure that you ask the lender for the PG to be discharged/released when it is no longer needed. Otherwise, if future borrowing is taken by the same borrower, the guarantee will probably act as security for the new borrowing.

Should I obtain legal advice before signing a PG?

If the PG is being given to a bank you will probably be required to obtain independent legal advice to avoid any allegations about undue influence. However, it would be sensible to obtain independent legal advice before anyway agreeing to sign a PG, to ensure that you understand the nature of the legal obligations that you are proposing to enter into.

If you would like more information about personal guarantees or a related matter, get in touch with Stephen Thompson on sthompson@darwingray.com, or call on 029 2082 9136 for a free, no obligation conversation.

 

 

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