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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.
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.
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.
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.
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.
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:
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.
If several directors “jointly and severally” give the same bank a personal guarantee then the bank:
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.
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:
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.
For instance, an indemnity might require you to pay the banks’s legal and court costs to pursue the debt repayment.
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.
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.
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:
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.
The six month period is extended to two years, if the lender is a “connected person”, e.g.
The courts presume a desire to prefer the lender, unless you prove the opposite.
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.
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.
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.
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.
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.