Matt Fretten, Head of Frettens’ Corporate & Commercial team, answers your questions on personal guarantees, the associated risks, and requirement of independent legal advice.

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.

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.

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 and why?

A majority of institutional lenders require individuals signing personal guarantees to seek independent legal advice before entering into a legally binding guarantee.

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.

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.

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.

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.

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 499 255 or get in in touch here. One of our corporate and commercial 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.