Nothing in business is ever certain. Suppose you have given a personal guarantee to secure business borrowing or support a commercial tenancy agreement, and your business gets into financial trouble. In that case, you are likely to have the threat of the guarantee being enforced.
If you default on the payments or your business fails and cannot repay the debt, that personal guarantee could potentially put your home and assets at risk. This is likely to cause you a lot of stress and anxiety.
There are, however, circumstances in which a personal guarantee may be unenforceable, which will ultimately get you off the hook as a guarantor. In this article, we explain the factors that might make your personal guarantee unenforceable and also look at some practical steps to limit your personal guarantee liability.
What is a Personal Guarantee?
A personal guarantee is a legal commitment that one or more directors will be responsible for paying back a loan should the business ever be unable to make payments. They can be used in financial transactions such as business loans, property mortgages and leases, asset lease agreements and invoice finance arrangements.
Personal guarantees provide a lender a further layer of security if the business cannot repay the debt and mitigate the risks in the event of your business becoming insolvent.
In situations where there is more than one personal guarantee, this is known as a joint and several personal guarantee. In such circumstances, a group of directors, not just one individual, would be responsible for paying off any outstanding liability. The lender will not necessarily target the directors equally and will likely focus on the director with more financial resources.
When are Personal Guarantees Enforceable?
If the company defaults on payment, becomes insolvent, or enters into liquidation proceedings, the lender will usually contact the guarantor to ask for payment. If that payment is not forthcoming, the lender can seek a court judgment to enforce the guarantee, meaning that your personal assets could be at risk.
Personal guarantees may also be enforced on a change of ownership if the new owner does not want to take on an existing company debt. Similarly, some agreements may have specific conditions that state when a guarantee can be enforced on a breach of contract, such as a missed payment.
Minimising Personal Guarantee Liability
When entering into an agreement that demands a personal guarantee, there are some steps you can take to minimise the personal risk that comes with a personal guarantee:
- Negotiate terms with the lender for more favourable terms, for example, structuring your personal guarantee to apply to specific obligations or transactions and not all debts.
- Obtain liability insurance that can protect against the risks that can come with personal guarantees.
- Renegotiate if you have other assets that could be used as security instead of a personal guarantee.
- Ensure you take legal advice before you sign any personal guarantees so you fully understand the risks and implications you could be faced with. A legal expert may also be able to assist in seeking to make the terms less onerous, for example, by limiting or capping your liability.
How Long Will Personal Guarantees Be Enforceable?
A personal guarantee is a binding contract and will be legally enforceable from the moment it is signed so long as it has been completed properly. There is no set time period during which a guarantee can be valid – this will depend on what is set out in the details of the personal guarantee.
There may, however, be a clause in the documentation that limits the period during which legal proceedings can be taken against the guarantor to recoup the debt- this is known as the limitation period. This is usually six years for most debt recovery cases but can be up to 12 years where the personal guarantee is considered a deed.
When are Personal Guarantees Unenforceable?
If the guarantee is in writing and signed by a guarantor with the intention and capacity to sign it, a personal guarantee is usually enforceable, although there are circumstances in which the lender cannot call in the personal guarantee.
Several factors can make a personal guarantee unenforceable, for example:
- Key or material information was not provided – this is when you did not receive important information that has a direct impact on your relationship with the lender. For example, you believed that someone else was a co-guarantee, but they weren’t, and you were not aware of this.
- You were misled – the lender secured the personal guarantee by means that could be considered misrepresentation or fraud, or you signed it under duress.
- Illegality- the guarantee or the terms contained within it are illegal in some way.
- The guarantee was not executed properly- signatures are missing, or there was no witness present when you signed it.
- Ambiguity – if the document’s terms are unclear or ambiguous in any way, this could result in the personal guarantee becoming unenforceable.
- Unfair term – Under the Unfair Terms in Consumer Contracts Regulations 1999, you can ask a court to determine whether a term is unfair. A lender may look to avoid the costs of legal proceedings if it thinks it may lose on this basis and instead choose to settle or not enforce the guarantee.
Most lenders now protect themselves against an unenforceable personal guarantee by requiring that the individuals signing the guarantee receive independent legal advice. If you have received legal advice, it is less likely that you will be successful in challenging the guarantee.
Challenging a Personal Guarantee
If you feel that you have grounds to challenge a personal guarantee that has been called, you should act quickly and consider all the facts and what route you want to take to make a challenge. This is because once the lender takes legal action, enforcement can be a swift process.
The cost of litigation is high, so you should only go down this route if you have legitimate grounds to base your claim on. If you do, the lender may be open to settling and reducing your liability as they will be reluctant to go to court, which may set a dangerous precedent that affects other guarantees that they hold.
Is a Personal Guarantee Enforceable if I Resign or Leave the Business?
Unless a clause in your guarantee states otherwise, you would still be liable for the debt if you decide to resign or leave the business, and this will not have a bearing on the personal guarantee.
In some circumstances, however, you may be able to tackle the personal guarantee at the time of your resignation. For example, it is worth asking if the personal guarantee can be transferred to any incoming director or request that you be released from the guarantee. While the lender is not obliged to do this, they may be open to considering it if the company is in a good financial state.
Legal Loopholes Associated with Personal Guarantees
Unless there is a reason the personal guarantee is unenforceable, it is not possible to get out of a personal guarantee. However, there are some practical steps you can take to reduce your liability:
- Personal Guarantee Insurance – if you have taken this out, this insurance can cover new or existing finance agreements and usually covers around 70 per cent of the liability
- Negotiation – it is costly and time-consuming to enforce a guarantee through the courts, especially if the lender is not sure that you have enough assets to pay the amount owed. As a result, it may, therefore, be possible to negotiate a lower amount or extra time to pay.
- Individual Voluntary Arrangement (IVA) – if a personal guarantee is called in, you may be able to enter into an IVA, giving you more time to repay the debt. The IVA could allow for the repayments to be made over 3-5 years and even possibly write off some of the liability. You should be aware, however, that an IVA will make it problematic for you to obtain credit in the future, as it will have a significant effect on your credit score.
How We Can Help
While it may be possible to challenge a personal guarantee that has been called in, such cases are rarely straightforward, making it essential that you seek legal advice.
Here at Witan Solicitors, we are experienced in disputes surrounding personal guarantees and can help you to challenge the validity of the personal guarantee or to limit your exposure under it.
We can also be on hand if you need advice or support if you are considering entering into a personal guarantee. Contact us today at 0300 303 2071 or email us for further information or advice.
