When it comes to law, everyone is an expert…
they ‘read it on the internet’; or perhaps a ‘mate’ told them; or they saw a clip on a TV programme. Instant access to information, doesn’t always get you access to the right information: our team hears misconceptions about the enforceability of guarantees and indemnities on a daily basis:
- “I did not obtain legal advice, so I am automatically okay?” – No.
- “I didn’t sign it so it’s unenforceable?” – Not necessarily.
- “I am no longer involved with the company, I just forgot I had signed it, they can’t come against me can they?” – Oh yes they can.
Our experts aren’t self-appointed! They’re recognised by the Legal 500 as bona fide experts with the experience and qualifications to back it up. All too frequently, at the time that guarantees and indemnities are agreed, no-one ever expects that they will be enforced. The business is bound to succeed, it will be making loads of money, and it’s just a means to an end to satisfy the lender…but unfortunately things do go wrong.
A guarantee is a contractual promise to ensure that a third party (usually the company borrowing the money) fulfils its obligations. The other type of agreement that directors and others are asked to sign is an indemnity, which is slightly different, in that it is a primary obligation, so there is no need for the creditor to claim against the principal before going against the person who has given the indemnity. Usually, banks and other creditors put together a document which is both a guarantee and an indemnity. In fact, from a legal point of view, the only one of the two that needs to be in writing is a guarantee.
Even if the bank do not suggest to you that legal advice is necessary (and there is no strict requirement for them to do so although they often do) it is absolutely vital that before signing any onerous agreement like this the full implications are understood. If you sign a guarantee and/or indemnity it is no defence to a claim in future that you did not understand the full nature of the agreement. Although any ambiguity would usually be resolved in favour of you if a dispute arises, a failure to understand the terms of the agreement is no defence. Nor often is a failure to obtain legal advice, especially if it is was offered.
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.
When it does go wrong?
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.