Personal Guarantees

In providing a personal guarantee the director is providing the lender with a further layer of security means that if the business becomes unable to repay the debt and shows the lender that the director believes in their business.

Where there is more than one personal guarantee, this is known as a joint and several personal guarantee. In these circumstances there would be a group of directors, not just the individual director, who would be responsible for paying off any outstanding liability. Where one director doesn’t pay, the remaining guarantors would pay off the full amount.

There are a number of circumstances when a personal guarantee would be used, for example Property mortgages and leases, Business loans, Asset lease Agreements and Invoice Finance Arrangements.

Personal guarantees are enforceable if the contract has been completed properly. They are unbreakable, and this applies in an insolvency. As soon as the business declares it is unable to repay, the lender can request that the outstanding balance is fulfilled. If the lender requests it, you will have to settle the debt and come to an agreement to pay it.

What a personal guarantee includes is determined by the relevant contractual documentation and the surrounding circumstances at the time the contract was made. Defining what a personal guarantee includes can be complicated and requires careful reading of all relevant documents. The interpretation may depend upon all the surrounding circumstances and even the conduct of the parties after the guarantee has been given.

The law imposes several formal requirements that must be met if a Personal Guarantee is to be enforced against the Guarantor. They include:

• The form of the personal guarantee:The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee (or some memorandum or note of the guarantee) must be in writing and signed by the Guarantor or a person authorised by the Guarantor. The writing may be a formal contract or agreement, or it can be given by simple means such as an email or memorandum.
• It must be signed: The Guarantor should sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature. The High Court in Golden Ocean Group Ltd v Salgaocar Mining Industries [2011] EWHC 56 decided that ‘signature’ should be given a wide interpretation.
• A creditor will not be able to rely on a verbal assurance that the director will guarantee their company’s liabilities.
• A guarantee is a contract in its own right, over and above the contract for which it is being given, and it must therefore comply with the basic requirements of a contract – including the need that there be “consideration” for the promise.

A personal guarantee can be given to ensure payment of a specific loan. It can often be up to a certain amount to cover the outstanding loan balance.  However, even if the loan is paid off by the company, the guarantee could remain in force to cover future borrowings up to that amount… Alternatively, a personal guarantee can contain a clause known as an “all monies” provision.  This means that the person giving the guarantee can be held liable for an unlimited amount of money borrowed by the company from that specific lender, covering both existing borrowings and future loans and overdrafts.

If you are a director of a company (even if you are not the finance director or an active participating director of the company) the law states that you will be assumed to be fully aware of the liabilities of the company and even if you were not involved in taking out the loan you could still be held liable for it under a personal guarantee that you give.

There is no requirement, if you are a director of the company, for the lender to ensure that you take legal advice before you sign the guarantee,  as it is again assumed that you are fully aware of the financial position of the company and its liabilities before giving the guarantee.

It is often unavoidable, if you wish to borrow money in the company’s name, that you give a personal guarantee. This is because the finance company knows that if the company goes into administration or liquidation and has no assets to pay the outstanding balance, it would be unlikely to recover the money from the company.  However, if the company’s directors have given a personal guarantee, the lender can pursue the individuals involved.

Very often, the guarantee will be in the form of a joint and several liability. This means that if the guarantee is called upon (i.e., the money is demanded from the individual), the finance company can pursue the guarantor for the full amount due and owing.  It does not have to split the liability equally among the number of directors.  This may seem unfair, but in practice, we have often encountered situations where directors go bankrupt and leave their remaining dire ors liable for the outstanding balance under a guarantee.

Common steps you can take to protect yourself before signing a guarantee:

1. What amount of money are you actually guaranteeing? Is it for a specific amount, or is the guarantee an all monies clause which means you could be liable for all the company debts taken out with that lender in the future?
2. Can you give notice and bring the guarantee to an end? It is always important that you think about what would happen if you left the company and resign as a director.  This does not automatically mean the guarantee comes to an end, and you should try to negotiate a clause stating that you can give notice under the personal guarantee to end your liabilities.  If you did give notice under the guarantee, it means you may be liable for the company’s debt on the day the notice period expires.  If the company fails in the future, you could be pursued for the amount that was owing when your notice period expired.
3. As we have outlined, a guarantee is normally a joint and several liability. This means that the finance company could decide to pursue only one director for all of the monies owing. This typically occurs when one of the directors has been declared bankrupt or has no assets.  The only way to prevent this is to have your fellow directors sign a “Deed of Contribution.” This records that in the event of the guarantee being called up you will all share a joint responsibility to pay an equal share of the outstanding money under the guarantee. This does not mean that you are fully protected, and it is possible that your fellow directors may not have the funds to pay their share of the debt.  However, it provides some form of protection and can offer you comfort in knowing that you share the burden equally of a guarantee being called upon.
4. If you resign as a director of the company, ensure that you can provide notice to the lender under the terms of the director’s agreement. If you sell a company and have given a guarantee, then you should obtain a warranty from the buyer of the company that they will indemnify you against any claims made under the personal guarantee (especially if there is no provision for you to give notice under the guarantee). Again, this will not fully protect you if the buyer has no assets and fails to make a payment, but you have tried to minimise the risk and brought the problem to the buyer’s attention. If the buyer refuses to give you a warranty, then it should start the alarm bells ringing and be a warning of a potential future problem.

We advise against giving a personal guarantee for loans taken out in the company’s name.  However, this is often unavoidable, especially if you have recently started a new business and the company does not have any other assets that can be used to secure the loan.

If you have no alternative other than to sign a guarantee, you can consider obtaining guarantee and indemnity insurance, which for a premium (which is usually fairly significant) will protect you against payment of either all or a significant proportion of the sum guaranteed and indemnified.

Do not assume that if you stop working for the company whose liabilities you have guaranteed or indemnified that the personal guarantee automatically lapses. It generally won’t, and the only way you will be able to get out of it is by serving notice terminating the guarantee, and even then this may be very difficult under the contractual terms, and may result in a claim being pursued at that stage for the full amount you have guaranteed or indemnified.  And you’ll still be on the hook for liabilities to the date of termination if things go wrong in future.

When you sign these documents, you have to assume that you are on the hook to a very significant degree, and quite often for an unspecified period of time.

Make sure, if possible, that the full extent of your liabilities is set out in the documentation. It is no defence, in general, to say that this was unfair as it is an open ended guarantee or indemnity.  As long as this is clear from the documentation, then this does not mean that the agreement is automatically unfair.

If you are uncertain about signing a guarantee, you can contact us at Wilson Browne Solicitors.  David Farmer is a partner in the Commercial Litigation Team and is an expert in this area.  David can advise you on the steps you can take to protect yourself before you sign a personal guarantee.  Alternatively, if you receive a letter from the finance company demanding repayment of a personal guarantee, David can advise and take steps to defend your position or try to negotiate a reduced settlement with the finance company.

Many documents are called guarantees when they’re not. The factors that courts take into account are:

1. Proper interpretation: contracts of guarantee are interpreted “as a whole”. It is the particular words used in the relevant clauses that count. Not what it’s called
2. Title of document: the title of the document is not decisive
3. Substance over form: Just because the word “guarantee” is used in the contract somewhere, does not make it a guarantee

Guarantees have a number of formal requirements to be a guarantee to put it beyond doubt that it is a guarantee.

• Form of guarantees:It must be evidenced in writing. The writing is may be formal contract or agreement, note, memorandum or promissory note
• Signed:The guarantor should sign it, or have their authorised agent sign it. The name may be written or printed, so long as it is intended to operate as a signature
• Secondary Liability:Establish that the guarantor has secondary liability to perform the guaranteed obligation. The principal debtor has the primary liability to perform the contract
• Consideration:The document should satisfy the requirements of any other contract.
  That means, offer and acceptance, consideration, an intention to be legally bound and capacity to make the contract

Some guarantees will have loopholes, others won’t. But it’s not just the terms of the guarantee that decide these things. The creditor may behave themselves in a way that prevents them from relying on the guarantee.

Some of the more common ways guarantors get out of a personal guarantee include:

• The guarantee was undermined by civil fraud, negligent misrepresentation or undue influence, because the guarantor was substantially misled before it was signed
• The creditor repudiated the contract of guarantee, and the guarantor accepts the repudiation
• The creditor has failed to tell the guarantor something that affects the relationship between the debtor and creditor
• A variation is made between creditor and debtor in a way which the guarantor would not have expected. Possibilities include:
• extension on the time to pay
• increase in the sum of the debt of the debtor
• A condition precedent to the guarantee was agreed and never satisfied.

Provided that the other requirements for creating a contract are met, a guarantee can be validly created over (or evidenced by) email, as email is capable of fulfilling the requirement that a guarantee be in, or be evidenced by, writing and signed. As an alternative, where the parties wish to execute a formal contract or deed of guarantee, but one or more of them is not able to attend a physical signing, they should consider a ‘virtual’ signing’.

If you are considering whether a personal guarantee is an option for you or you already have one in place and would like it to be reviewed or are being pursued by creditors we can review the enforceability of the guarantee for you.

Don’t do it yourself! Get expert advice.  Guarantees and indemnities are subject to general contract law principles relating to offer and acceptance, and there needs to be consideration. What this means is that there needs to be some sort of transfer of value between the parties, but this does not have to be in monetary terms.

It’s not necessarily doom and gloom. We regularly succeed in defeating these claims entirely or in reducing the payments significantly.

There are technical defences available depending upon the timing of signing of the documentation, so for instance if a guarantee and indemnity is signed after the company is already legally entitled to receive the funding, then this may constitute a defence to the guarantee and indemnity.

Other potential areas of attack relate to misrepresentation, where statements have been made to the guarantor that subsequently were proved to be untrue, which caused the guarantee and/or indemnity to be signed. Issues relating to undue influence and misrepresentation particularly apply where the person giving the guarantee and indemnity is not someone intrinsically connected with the business, or where agreeing to give the guarantee is not in their personal interests.  Again, these are technical areas where we can assist with identifying any potential defences.

There may be defences available as a result of changes to the underlying loans or finance agreements after the document has been signed. Whilst quite often standard wording in these documents allows the bank or lender to change the terms of the underlying agreement, this is not always the case.  If the facility you were guaranteeing has changed so that the level of risk is such that you would never have entered into the guarantee if you had known about it, then this may be a potential avenue for defending against a claim.

Even if it is necessary to make some payment under a guarantee or indemnity, there are very often arguments available to reduce the potential liability. Creditors are reluctant to risk a huge amount of money in pursuing litigation where they can obtain an early settlement, albeit at a reduced level to the overall indebtedness.  Even after payment has been made, a guarantor can often have the right to pursue some contribution from co-guarantors, or to claim an indemnity from the principal, so for instance if the company is entering into a CVA, this would usually allow a guarantor to claim payment from the CVA/insolvency waterfall.

The overall advice, is obtain expert assistance before you enter into a guarantee and/or indemnity, and certainly do not assume that agreements such as this are generally unenforceable. Get advice early before court proceedings are issued.  Expert litigators can consider all of the documentation and surrounding circumstances to identify exactly what defences are available, and to either defend a claim entirely, or negotiate the best possible outcome.