COMMERCIAL UPDATE 57 PERSONAL GUARANTEES – WHAT SHOULD BE IN THEM?

A personal guarantee (PG) is an agreement between a business owner and lender, stating that the individual who signs is responsible for paying back a loan should the business ever be unable to make payments.

A PG is a guarantee given by an individual rather than a company. The liability to honour the guarantee is personal, there’s no protection from the entity being guaranteed (usually a company) and this means that all of your personal assets are on the line.

PGs are a promise by a person not responsible for performance of an obligation in the scenarios set out below. In essence, the guarantors receive no direct benefit from the obligation and expose themselves to liability of the obligation for no return.

PGs are therefore unsurprisingly(!) attractive to creditors when the guarantor has assets to cover the exposure of the creditor.

There are a number of scenarios when a PG would be used, for example:

  • Business loans;
  • Property mortgages and leases; and
  • Other forms of lease (HP for example).

Please note though, that practically any contract obligation can be guaranteed by another person, not just business loans.

What a PG includes is determined by the relevant contractual documentation and the surrounding circumstances at the time the contract was made. Essentially though, PGs are important commercial documents, when you sign one it’s difficult to get out of it, if they are properly done.

So how to lessen the effect of them? Well, PGs can be:

  • Limited to part of the obligations of the entity being guaranteed;
  • Subject to specific methods of notice;
  • Limited in time;
  • Capped to a specific amount; or
  • Any other condition which may be agreed.

PGs also have a number of formal requirements being:

  • They must be evidenced in writing;
  • The guarantor should sign it;
  • The document should satisfy the requirements of any other contract.

Guarantors have all the defences to payment and/or performance available to them as the debtor, so what does this mean? In essence this means two things:

  1. where the debtor remains liable to the creditor, so does the guarantor under the PG;
  2. There may be terms in the PG, which caps the liability of the guarantor or even limits the time in which the credit can call upon in the guarantor to make good the default.

In conclusion, defining what a PG includes can be complicated and requires careful reading of all relevant documents.

A conclusive answer on its interpretation may depend upon all the surrounding circumstances and even the conduct of the parties after the guarantee has been given.

Please get in touch if we can help or you need any further information on this, remember though that with PGs, ‘look before you leap’ is the best strategy…..

Regards to all

Roger