Personal guarantees

Banks have commonly required business owners of small and medium-sized businesses to provide personal guarantees for loans made to their businesses.  You may have to repay the loan if the borrower defaults. Because of this lenders will often require guarantors to take independent legal advice on the implications and risk of the guarantee, and we offer this service.

How we can help

We explain in easy language how the personal guarantee operates and the implications for you as the guarantor.

In some situations we find borrowers only want us to quickly explain the risks, in order to satisfy the lender's requirements. This would mean our independent advice costs will be at the lower end of fixed-fee options, but this approach is not recommended and carries risk.

However, fully understanding the risks and potentially negotiating a cap to the guarantee, a time limit or other protections is generally the better option, but does typically involve some additional negotiation with the lender, so may mean greater legal fees.

Usually, where a primary asset of the guarantor is jointly owned, typically a property, banks may insist that the guarantor and any co-owner both take independent legal advice and that both become guarantors. This can help to reduce the ability of a co-owner to challenge the guarantee’s enforceability, by arguing undue influence or misrepresentation.

What are the legal risks of providing a personal guarantee?

A company has a separate legal status, and is responsible for its debts. Thus, lenders cannot generally recover the company’s debts from directors or shareholders. Similar rules apply to limited liability partnerships.

So, lenders often demand personal guarantees. If the company defaults on its debt repayments, the lender has additional security in the form of the personal guarantee.  The guarantor risks their home and personal assets if the borrower defaults and fails to repay the loan.

Typical clauses in personal guarantees that catch out guarantors include:

• Repayment on immediate demand.
• No power to negotiate repayment terms.
• Joint and several liability - If several directors jointly and severally give the same bank a personal guarantee, then the bank does not have to take action against all directors, but can claim the whole amount from any single guarantor.
• Security for the personal guarantee - often the bank will insist on taking security over the guarantor’s assets. Depending on the security and the circumstances, the bank may be able to enforce its security and realise the relevant assets without first obtaining a court judgement.  However, if the guarantor co-owns their home with their spouse, then banks usually require co-owners to provide independent legal advice and security.
• Indemnity - the lender may include in the personal guarantee an indemnity which means the lender may have additional rights to recover amounts from the guarantor, including in circumstances where it may otherwise have difficulty enforcing the underlying obligation against the primary borrower.

How to limit risk under a personal guarantee

There may be an opportunity for a guarantor to limit risk under the personal guarantee. The opportunities will vary from company to company.  Options for limiting risk include:

• Access to business records - provides a form of early warning if the guarantor is not a director.
• Veto rights - giving the guarantor the right to veto certain business decisions which the guarantor may consider could increase the risk of the company performing badly and putting the guarantor at risk.
• Cap on amount or time - limiting the overall guarantee amount or having an automatic expiry date on the guarantee.

We are always happy to discuss your requirements. Please get in touch to discuss how we can help.