Personal guarantees mean that you pledge personal assets which the lender can seize if your company defaults. Lenders require guarantors to take independent legal advice on the personal guarantee – we can do this for you.
Our fees for a review and signature to confirm you have received independent legal advice are £450 plus VAT and £290 plus VAT for each additional person.
Reasons for picking us to review your personal guarantee
We explain in easy language what the personal guarantee means in practice.
- We review and sign documents quickly and reasonably priced.
- You can meet us at our central London office at short notice.
- We can look for robust solutions to reduce commercial risk wherever possible outside of the guarantee obligations.
Our personal guarantee review includes:
Director personal guarantee
A company has a separate legal status, and is responsible for its debts. Thus, lenders cannot easily recover the company’s debts from directors or shareholders. Similar rules apply to limited liability partnerships. Means of recovery include injunctions and court litigation which can be lengthy and expensive.
So lenders often demand personal guarantees from directors which can be relied on by the lender. If the company defaults on its debt repayments. the lender has additional security.
What to be wary of with personal guarantees
Provisions that catch out guarantors include:
- Obligation to pay the banks costs if the loan is repaid early;
- Repayment on immediate demand;
- No power to negotiate repayment terms.
Personal liability under the personal guarantee
If the business does not meet the payments or obligations required under the guarantee then you as the guarantor have a personal obligation. The risks can include:
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, i.e. chase, all directors; but
- Can claim the whole amount from any single guarantor.
Secured guarantees, third party charges & indemnities
Often the bank takes security over the guarantor’s assets. Then the bank can sell the guarantor’s assets to meet the debts, without going to court.
These assets usually include your family home. However, if the guarantor co-owns their home with their spouse, then banks usually require co-owners to also provide the security.
Usually, banks insist the guarantor and co-owner take independent legal advice before giving the secured guarantee. This reduces a co-owner’s ability to challenge the guarantee’s enforceability, by arguing undue influence or misrepresentation.
Personal guarantees combined with security over assets
A personal guarantee combined with security over assets in a single document is called a ‘third party charge’. Under this agreement the director’s liability is usually unlimited.
A non-recourse charge is beneficial. This is because:
- Liability is limited to the charged property’s value; which means
- If the property sale does not generate sufficient funds there is no further recourse to the director or his remaining assets.
Indemnities under personal guarantees
Often lenders add indemnities to personal guarantees. Indemnities can have a greater impact on personal liability than a guarantee. This is because a guarantee depends on the business repaying the debt. The amount guaranteed should not exceed the amount the business owes the lender. However, an indemnity is independent of the business and lender’s relationship. It can even apply after you’ve paid off the debt.
The way a personal guarantee indemnity works is:
- If the business fails to meet its obligations, and
- Consequently the lender suffers losses; then
- The indemnity assures the lender; that
- The person giving the indemnity pays those losses.
For instance, an indemnity might require you to pay the banks’s legal and court costs to pursue the debt repayment.
Limiting your risk under a personal guarantee
There may be an opportunity for a guarantor to limit risk. The opportunities will vary from company to company. We summarise some ideas which we have put into practice.
Access to business records
We enhance the limit provisions within the Companies Act. We give guarantors the right to access whatever business records they consider necessary with reasonable notice. The Companies Act only extends to directors and gives no time scale. The articles or shareholders’ agreement can provide enhanced rights.
Right to repay loan
The articles or shareholders agreement can be revised to provide that given sufficient funds, the guarantor gains the right to direct the company to repay the loan. This type of clause stops others being paid before the bank loan is paid off.
We draw up a list of issues to which the business cannot agree without the guarantor’s consent. In effect the guarantor gains a right of veto.
Guarantor approves winding up
The Companies Act requires 75% of shareholders to vote for a voluntary winding up. We change this provision to require the guarantor’s approval as well given the financial stake at risk.
Amendment to director or employment agreement
A director giving a guarantee is accepting additional obligations and risks. We often amend director service agreements to cater for these obligations and risks. For example, you need to think through what would happen if you were dismissed. Without expressly dealing with the point the personal guarantee continues which may be far from desirable.
Disputes over personal guarantee enforceability
There can be legal issues or loopholes with personal guarantees and sometimes there are opportunities to negotiate. Whilst the best option is usually to find ways to limit the personal guarantee, we do have clients who instruct us to challenge the enforceability. If you need good legal advice on this aspect, we can help.
Please do contact us if you need lawyers for personal guarantee review or advice.