In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at dealing with solvent liquidations with no tax clearance.
This is the summary of that briefing.
Matt Fretten, head of Frettens' corporate & commercial team, answers the most frequently asked questions about personal guarantees.
What is a personal guarantee?
A personal guarantee is a legally binding obligation on an individual to repay a third party’s debt or borrowing. Often encountered in the context of a limited company borrowing funds from or incurring a liability to a third party, which are then guaranteed by an individual director or shareholder.
What is a personal guarantee for a business loan?
If a limited company is borrowing funds from a lender, a personal guarantee is often a requirement of such funding introducing a personal element of risk for the relevant director or shareholder in respect of such borrowing.
The addition of a personal guarantee provides greater security for a lender than simply relying on the contractual obligations binding the limited company borrowing the funds.
What is a personal guarantee on a lease?
A personal guarantee may be a requirement placed on a limited company tenant entering into a lease of premises. The obligations under the lease may be guaranteed by an individual director or shareholder to provide the landlord with greater security.
How does a personal guarantee work?
A personal guarantee will normally be in writing and may either be a separate document or incorporated into a document between the relevant borrower/tenant and the lender/landlord.
What is joint and several liability?
If there is more than one guarantor, their liability is normally ‘joint and several’ meaning that the guarantors have ‘jointly’ made the same promise to the person requesting the guarantee but also individually made the same promise to the relevant person.
The net effect of this is that the person entitled to enforce the guarantee may pursue one or all of the guarantors to satisfy any sums due, putting any of the guarantors at risk of having to settle the full amount due under the guarantee.
Do you need to receive independent legal advice before signing a personal guarantee?
A majority of institutional lenders require individuals signing personal guarantees to seek independent legal advice before entering into a legally binding guarantee. This legal advice will need to occur face to face.
Some lenders will require company directors or shareholders to have their personal guarantees witnessed by a solicitor who will also be required to confirm in writing to the lender that independent advice has been given (often at an obligatory face to face meeting) with written confirmation that the nature and effects of signing the guarantee have been properly explained to the guarantor.
Why do you need independent legal advice for a PG?
The lenders are seeking to remove any possibility that guarantors will argue, if the guarantees are enforced against them, that they either did not understand the nature of the document they signed or that they were in some way pressurised or unduly influenced before signing off the guarantee.
Most law firms charge a fixed fee for providing the necessary independent legal advice required. If you would like to speak to someone at Frettens about this, you can get in touch here.
What are the risks with personal guarantees?
Ultimately, the ramifications of signing any personal guarantee means that a guarantor will be faced with repaying the debt or complying with the obligations he or she has undertaken to guarantee to the third party.
If a guarantor is unable to meet such obligations then they risk being the subject of enforcement action for any debt arising under the guarantee (often with costs and interest accruing on a daily basis) and if these obligations cannot be met from the guarantor’s assets, they could be made bankrupt.
As a result, personal guarantees should never be lightly entered into.
Can a personal guarantee be revoked?
Some lenders do provide in the guarantees for guarantors to have the ability to serve notice and bring their guarantees to an end.
However, caution should be exercised as the service of such notice may only crystallise any liability of the guarantor (not remove liability altogether) and may also result in the borrower being asked for additional security to avoid defaulting under the relevant facility.
Beware of triggering any unintended consequence.
Can a personal guarantee be transferred?
It is highly unlikely that the obligations under a personal guarantee will be freely transferable by the guarantor. If a guarantor wishes to be released from his guarantee then he will have to seek the consent of the lender and may have to find a replacement guarantor satisfactory to the lender before being released.
When is a personal guarantee enforceable?
Any default by the borrower may result in the lender or landlord seeking to enforce a guarantee against the guarantor. In many personal guarantees, the lender or landlord is not obliged to make a demand or enforce against the borrower before seeking to recover from the guarantor.
Personal guarantee when company is in liquidation
The liquidation of a borrower – being a limited company – would trigger the enforcement of a guarantee. In most guarantees, the liquidation of the borrower would not impact on the enforceability of the guarantee given.
Can I get a business loan without a personal guarantee?
This will depend on individual lenders’ borrowing requirements. It is true to say, however, that where individuals borrow money using a limited company vehicle (which perhaps is recently incorporated or has no other assets) a personal guarantee from the directors would be expected.
Personal guarantees when buying a house through a business
When a property is bought via a limited company – and there may be many reasons why individuals choose to do this – lenders will often automatically seek personal guarantees from the relevant directors/shareholders.
What is a personal guarantee indemnity?
If a guarantee incorporates an indemnity (and most personal guarantees will incorporate an indemnity element) then the obligations on the guarantor are significantly increased.
In simple terms, an indemnity is a promise to be responsible for (or make good) another’s loss and also creates a primary obligation meaning that a guarantor could end up liable under a guarantee even if the original contract between the borrower and the lender proves unenforceable for whatever reason.
Independent legal advice for personal guarantees
If you need or would like independent legal advice on a personal guarantee, then you can call us on 01202 499255 or get in in touch here.
Someone within our team will happily arrange a meeting or call with you and provide any relevant paperwork that your lender requires as proof.
The process is normally relatively straight forward and can be turned around fairly quickly.
We charge a reasonable fee for providing such advice, with discounts available when more than one Guarantor requires independent legal advice.
*Please remember that most lenders require advice to be given face to face. We are based in Christchurch and Ringwood on the South Coast, so bear that in mind when contacting us and arranging a meeting.
