Personal guarantees: what exactly are they and how can they be enforced?

To get business loans or support a commercial tenancy arrangement, you can be required to provide a personal guarantee as a director of the firm. You may not have considered much about it at the time. However, if you refuse to make payments or the firm collapses and is unable to repay the loan, your house and other personal assets may be jeopardised. 

Always make sure the personal guarantee is legal if you find yourself in this situation. In some cases, a guarantee may be considered unenforceable, which might relieve you of your responsibilities as a guarantor. Here, we’ll look at what an unenforceable personal promise is, what elements may render it unenforceable, and how you might contest it.   

What exactly is a personal guarantee?

A personal guarantee is a legal agreement that one or more directors will pay off corporate loans if the company is unable to do so, making it personally liable. Giving them an additional means to collect the funds reduces the lender’s risks if your company becomes bankrupt and assists you in obtaining critical finance for your company’s survival.   

Personal guarantees are often subject to restrictions. For instance, they may only cover a portion of a loan or apply for a limited period of time, affecting how you manage your personal finances. If more than one director makes a guarantee, they are typically considered jointly and severally responsible, which means the lender may execute the guarantee against one or both directors. The lender will not always target each director equally. Instead, it will often concentrate on the director who has greater financial resources and high-value assets. 

Personal Guarantees Enforceability

The lender should not have any concerns as long as the guarantee is in writing and signed by a guarantor who has the right and competence to sign it. Even if you quit or close the company down, the lender is typically able to enforce the guarantee.

If a company fails to meet its financial obligations or goes bankrupt, the lender will normally contact the guarantor to collect payment. If you refuse to make the payment, the lender may seek a court order to enforce the guarantee, which might put your assets at risk. 

When is a Personal Guarantee Unenforceable?

An unenforceable personal guarantee is one that the lender cannot rely on if the firm fails to pay a debt, leaving the business owner in a precarious position. A personal guarantee might be unenforceable for a variety of reasons, including:

• The creditor failed to provide you with all of the information, or there was some element of deception or fraud that influenced your decision to sign the guarantee. 
• Important information that directly affects your relationship with the lender was not provided to you. 
• The guarantee’s terms or the transaction from which it originates are unlawful in some manner. 
• There are missing signatures on the guarantee, no witness was present when you signed it, or the content is confusing.
• Between the time you signed the guarantee and the creditor’s claim, the loan facility underwent significant modifications, but you were not made aware of them.
• The contract had a requirement that was never fulfilled.
• The creditor fails to initiate timely action to collect the loan, which may result in default on the personal guarantee. Generally, they have six years to collect the debt, but if the personal guarantee is regarded as a deed, they have twelve years.  
• The contract includes an unreasonable term, as defined in the unreasonable Terms in Consumer Contract Regulations (1999). In this case, you might take the guarantee to court. If the creditor believes they will lose and does not want to spend legal fees, they may decide not to enforce the guarantee and allow you to repay the debt. 
• If any of the conditions of the guarantee appear unclear or imprecise, you may have grounds to dispute it in court with legal advice. 

Most lenders now demand all potential guarantors to get independent legal counsel prior to signing. If you seek legal counsel, you are less likely to be able to effectively dispute the guarantee. 

How can you Contest a Personal Guarantee?

If you wish to contest a personal guarantee, you must do it quickly. That will allow you to assess various possibilities for a challenge before enforcement starts. 

Considering the high expense of litigation, you need to have a solid justification for your case. If you do, lenders are usually hesitant to go to court because it may establish a risky precedent for thousands of guarantees they hold. As a consequence, they may be ready to work out a settlement that reduces your liability.   

Can I walk out of a personal guarantee?

You may take the following useful actions if a personal guarantee you gave has been invoked and you believe it to be enforceable in light of the information in this article:

• Personal guarantee insurance may insure up to 70% of the liabilities under new and existing credit arrangements. 
• Lenders will do everything in their power to stay out of court. If you cannot afford to pay your debt in full right away, try to negotiate a lesser sum or request additional time to pay. 
• An IVA is a legal debt arrangement that allows you to pay what you owe over a five-year period, which can be a relief for those who are personally liable. It will have a significant influence on your credit score, but it may assist in protecting your possessions while you manage your finances. 

Need some advice?

We can assist if your company is unable to pay its bills and you are concerned about a personal guarantee you made. Please contact our team of registered insolvency practitioners to schedule a free, same-day consultation or a meeting at one of our locations around the UK.