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Personal Guarantees - what to watch out for

View profile for Karen Edwards
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A Personal Guarantee is a contractual promise to pay the liabilities of another. The guarantor is normally a shareholder, director or group company with assets. The debtor is typically the guarantor’s company. As the economy continues to falter, an increasing number of creditors request personal guarantees as a way of covering any shortfall in debt owing by a company.

What to be aware of? From the perspective of a borrower it is necessary to ask yourself if giving a personal guarantee is completely necessary, as the financial implications could be severe if the personal guarantee was ever to be enforced against you. It is essential to take legal advice to ensure that you understand the implications and consequences of giving a personal guarantee. Never just sign a personal guarantee.

Commercial Solicitor, Karen Edwards, says “A personal guarantee is usually continuous in time, which means that there is no termination date unless you are willing to pay the lender the full outstanding balance of the loan. Do cap your liability to an amount that is affordable, but remember that interest and costs can be added to this.”

“If you have savings with the lender (e.g. where the lender is a bank), depending on the terms of the personal guarantee, these can be in danger if the lender calls in the debt. If other co-directors have also given a guarantee this does not necessarily mean that you only have to repay the lender in equal proportions; usually, the personal guarantee will be given jointly and severally, meaning that it can pursue whichever guarantor it chooses, for the full amount.”

The only way to bring your personal guarantee to an end is either to ask the lender to release you in writing, or include a provision in the guarantee agreement allowing you to terminate on notice. This will cap your liability under the guarantee to the amount owed by the company at that time.

Before providing a personal guarantee it is important that you do seek legal advice. Frettens can help with this; we can also help if you are faced with a demand on a personal guarantee which you have given.

For a free initial chat, please call 01202 499255 and Karen or a member of her team will be happy to discuss any questions that you may have.