Personal Guarantee Review

Personal guarantees mean that you pledge personal assets which the lender can seize if your company defaults. If your lender requires you 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 director.  

Reasons for picking us to review your personal guarantee

We explain in easy language what the personal guarantee means in practice.  We have a strong track record of acting for a variety of banks and lenders.

  • 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:

 

The consequences of a 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.

So lenders often demand personal guarantees which can be relied on by the lender, if the company defaults on its debt repayments. This guarantee is not an agreement between the company and the lender, but between an individual and the lender. Thus the lender gains additional security. The individual guaranteeing the loan must ensure that the guarantee agreement is fit for purpose.

Typical traps

We find guarantee documents contain onerous provisions, which we first clarify. Thus we reduce the chance of disputes emerging.  Issues that might seem unimportant and unlikely to be of any real consequence at they time of entering into the personal guarantee can become important if the guarantee is called upon by the lender.

The lender is not obliged to advise you on the provisions or their effect. Remember, not only can the lender liquidate your business, but also personally bankrupt you.

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.

If you sign a personal guarantee, you promise the business will fulfil the obligation, e.g. repay a loan, pay rent. If the business does not fulfil the obligation, you fulfil them.

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 obligations can include:

Judgement debt

The lender, the guarantee’s beneficiary, takes the defaulting guarantor to court. The result is often a judgement debt against the director’s personal assets, including the family home.

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 guarantors’ 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.

“Non-recourse” charges

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 gurantees

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.

Directors’ duties

Any director who gives a guarantee must declare their interest, in the relevant transaction, to the other directors. The articles of association may prevent this director voting on the matter.  In some articles,  guarantees are an exception. We often review and co-ordinate the articles with the shareholder or LLP agreement.

Conflict of duty

The guarantee may create conflict between a director’s personal interests and the company’s interests.  A shareholder’s resolution, or if the articles permit the other directors, should approve this situation.

Preferential treatment

If a company gets into financial difficulties, preferential treatment is where a guarantor who is also a director pays a creditor, to whom he gave personal guarantees, before other creditors.  Preferential treatment is a breach of duty.

Directors owe a duty to the company. However when insolvency threatens, they owe a duty to the company’s creditors.  A court could:

  • Unwind the transaction;
  • Disqualify the director, because of the breach of duty;
  • Leave the director, personally,  with the liability he guaranteed.

Pay debts as they fall due

Company directors should pay debts as they fall due. They should not prefer one creditor, including a lender, over another.

A liquidator can apply to the court to set aside any transaction within the six months preceding the liquidation. The liquidator must prove the director was influenced by a desire to protect himself, and thus preferred that particular creditor or lender.

Connection between  guarantor and lender

The six month period is extended to two years, if the lender is a “connected person”, e.g.

  • Company shareholder;
  • Subsidiary;
  • Director; or
  • Member.

The courts presume a desire to prefer the lender, unless you prove the opposite.

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.

Guarantor’s consent

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.

Looking at issues outside of the review of the guarantee  will incur additional costs which we will discuss with you.

  • Gannons were extremely quick and efficient in explaining the risks involved with entering in to a personal guarantee. I was under pressure from the bank to sign and need their advice at short notice.

  • We were able to re-negotiate the terms of a proposed personal guarantee to reduce my exposure. The Gannons team were really helpful.