What is a Personal Guarantee
A Personal Guarantee is a commitment by an individual, usually a business director or family member, to be personally liable for the company’s debts or third party’s obligations. This guarantee can come into play if the business or family member fails to meet its financial responsibilities.
An illustrative example of a personal guarantee
For example, QuickGrow Garden Supplies Ltd, wants to borrow £20,000 from the bank to buy more stock. The bank asks the director, Sam, to promise to pay back the loan himself if QuickGrow is unable to do so by way of a personal guarantee. This means if QuickGrow does not meet its payments to the bank to repay the loan, Sam will be personally liable to repay the debt to the bank and he may have to sell his assets to pay the bank.
If you have been asked to enter into a personal guarantee or if you have been asked to repay a debt which has been secured by way of a personal guarantee, please call us for a Free Consultation on 0207 459 4037 today.
Different types of Personal Guarantees
Personal guarantees are categorised into two primary types:
- Unlimited Personal Guarantees – where the guarantor is liable for the entire debt of the business, including any additional fees or legal costs incurred in the debt collection process.
- Limited Personal Guarantees – will usually specify a cap on the amount for which the guarantor is responsible. This arrangement is often used when there are multiple owners or partners, each agreeing to cover a specified portion of the business’s liabilities.
Illustrative examples
- In an Unlimited Guarantee, imagine “XYZ Enterprises” fails to repay a £50,000 loan. The guarantor, under an unlimited guarantee, is liable for the full £50,000 plus potential legal fees.
- For a Limited Guarantee, if three partners in “ABC Startups” each sign a guarantee for one-third of a £60,000 loan, and the company cannot repay, each partner is liable for up to £20,000, reflecting their share of the guarantee.
Common use of Personal Guarantees
Personal guarantees are widely used for:
- Securing Business Loans: When a new company needs money to grow but doesn’t have enough business credit.
- Leasing Property: If a company wants to rent a space for its operations but the landlord needs more assurance.
- Supplier Credit: Helps businesses buy now and pay later when buying supplies or inventory.
- Equipment Financing: When purchasing machinery or equipment necessary for business operations without sufficient collateral.
- Business Overdrafts: Ensuring a bank will cover overdrafts, giving businesses flexibility in cash flow.
- Franchise Agreements: Often required by franchisors to ensure the franchisee meets the financial obligations of operating the franchise.
- Business Credit Cards: For obtaining credit cards in the business’s name, especially when the business doesn’t have a strong credit history.
When may Independent Legal Advice be required?
Independent legal advice may be required in several scenarios, particularly when entering into significant financial agreements. This includes situations where an individual provides a personal guarantee for a business loan, leasing agreements requiring a personal commitment, or any contractual arrangement where personal liability could be incurred.
It ensures the individual fully understands the legal implications and potential risks involved in the commitment.
What are the risks of Personal Guarantees?
The risks of personal guarantees include the potential for significant personal financial loss.
For example, if a business fails to repay a loan, the guarantor could lose personal assets like a home or savings to cover the debt. This situation could lead to personal bankruptcy if the guarantor cannot fulfil the debt obligation.
Individuals must understand these risks thoroughly before entering into such agreements.
When can you become liable under a Personal Guarantee?
Liability under a personal guarantee arises when the primary borrower—the business—fails to meet its repayment obligations. This situation can occur due to financial difficulties, insufficient cash flow, or insolvency.
When the business can’t pay its debts, the lender turns to the guarantor for payment.
For example, if a business takes out a loan and later cannot afford the monthly payments, the guarantor is then responsible for covering these payments with their assets.
Benefits of Independent Legal Advice for Personal Guarantees
The benefits of independent legal advice for personal guarantees include:
- Understanding Obligations: Clarifies the legal terms, ensuring full comprehension of what you’re agreeing to.
- Risk Awareness: Highlights the financial and legal risks, providing insight into potential consequences.
- Risk Mitigation: Offers strategies to mitigate risks, possibly through negotiating better terms.
- Protection of Personal Assets: Advises on how to safeguard personal assets from potential claims.
- Informed Decision-Making: Ensures decisions are made with a comprehensive understanding of the guarantee’s implications.
- Peace of Mind: Provides reassurance that the guarantee is entered into with all necessary information at hand.
When can a Personal Guarantee be unenforceable or challenged?
A Personal Guarantee can be challenged or found unenforceable in situations such as:
- Lack of Capacity: If the guarantor did not have the legal capacity to enter into the guarantee.
- Misrepresentation or Fraud: If the guarantee was signed based on incorrect information or deceit.
- Undue Influence or Duress: If the guarantor was pressured unfairly or forced into the agreement.
- Ambiguity in Terms: If the guarantee’s terms are unclear or ambiguous.
- Improper Execution: If the guarantee wasn’t signed or witnessed correctly.
- Variation of Terms: Changes to the original agreement without the guarantor’s consent.
- Release or Discharge: The guarantor is released from obligation under certain conditions.
- Statute of Limitations: The claim against the guarantor isn’t made within the legal time frame.
Fixed Fees & Flexible Funding Options
Navigating the issues and risks of personal guarantees can be difficult especially when your personal assets and bankruptcy may be a risk should there be a default.
Our lawyers provide flexible funding options including fixed fees and “no win no fee” arrangements to pursue your personal guarantee dispute, and if you need independent legal advice on a personal guarantee we offer a fixed fee package for review and advice in consultation with our expert lawyers.
Please do not hesitate to call us today on 0207 459 4037 for a Free Consultation with our personal guarantee lawyers.
