Posted: Wednesday, 18 June 2014 @ 10:27
A personal guarantee is a security given by one person or company for a loan or other obligation of some other person or company (the “debtor”). The personal guarantee is given to a creditor or potential creditor (usually a bank, trade supplier, or landlord) of the other person or company.
In Part 1 of this Guide I will look at the basic principles of a personal gurantee. In Part 2 I will look at advice relevant before a personal guarantee is given, and in part 3 I will look at enforcement.
• The personal guarantee must be in writing and signed by the guarantor. Unless the creditor can produce a signed guarantee they cannot enforce it against the guarantor.
• Unless there is fraud or misrepresentation, the personal guarantee cannot be challenged for mere non-disclosure by the creditor of facts known to the creditor affecting the risk to be undertaken by the guarantor.
• The rights of the creditor against the guarantor are regulated entirely by the written terms of the specific guarantee.
• The obligation is usually a continuing one which will not determine by death of the guarantor, so it will be a continuing liability of the estate of the guarantor.
• The creditor is under no obligation to attempt recovery from the debtor before going after the guarantors. Proof of default is enough.
• It is necessary for the creditor to make a formal demand in writing on the guarantor before the guarantee can be enforced.
• Where there are 2 or more guarantors, the creditor may choose how to enforce the guarantee against co-guarantors, and may just proceed against one guarantor. A guarantor cannot dictate to the creditor how to enforce a guarantee. However, there is a right to contribution between co-guarantors.
• If a guarantor does make a payment to the creditor, the guarantor will have a right of action against the principal debtor for the sums paid, including interest and costs, and for the guarantor’s own costs. However this right is often restricted in favour of the creditor, until all the debt has been repaid, by the terms of the guarantee.
• If the guarantor pays the creditor, and the creditor holds some other security from the debtor, then the guarantor is entitled to the same benefit of the security. Again this right is often restricted by the terms of the guarantee.
• The guarantor will be able to set off from the principal debt owed by the debtor to the creditor any counterclaim which the debtor may have against the creditor. This right, and any personal counterclaim of the guarantor against the creditor, is often excluded by the terms of the guarantee.
• Co-guarantors have a right of contribution. This means that any guarantors of the same debt, even if given on different dates, and even if unknown to each other at the time, can claim an equalisation payment for other guarantors if they have paid more than their share of the debt to the creditor. It does not matter whether the guarantees are for different sums, if it is a guarantee of the same debt. For example they may have different caps on their liability. In that case they will have a liability according to the proportion of their guarantee to the total debt covered by the guarantees.
• The terms of personal guarantees often restrict the right of action against by the guarantors against the debtor, and against co-guarantors, and any right to claim the benefit of other securities from the debtor held by the creditor, until such time as the creditor has been paid in full
• The terms of personal guarantees often give the guarantor the right to terminate the guarantee on written notice. This does not discharge the guarantor’s liability, but it will be fixed at the time the notice takes effect. It is likely to trigger enforcement action by the creditor.
• A guarantor will be released from any obligation if the creditor releases the debtor from the liability, but this can be varied by the specific terms of the guarantee agreement.
• A guarantor will be released from the guarantee if the creditor, without the agreement of the guarantor, varies the contract with the debtor, or acts in any way which is prejudicial to the guarantor. However, this right is normally excluded by the specific terms of the guarantee, which often give the creditor a free hand to deal with the creditor as it pleases, even if it does prejudice the rights of the guarantor.
• Where a guarantor executes a personal guarantee, on the understanding that the creditor will take certain securities from the debtor, the guarantor will be released if the securities are not taken and retained. The same applies if other guarantors, who were understood to be providing separate guarantees, do not sign their guarantees. But again, these situations are often covered by the specific terms of the guarantee, in favour of the creditor, excluding a right of a guarantor to avoid a guarantee for failure to take securities or other guarantees.
It is vital to consider the written terms of a personal guarantee to understand the legal effect of the promise to pay. It is advisable to take seek early expert legal advice on the specific Personal Guarantee.
Business and Litigation Solicitor
Tel: 0845 003 5639
Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation
to discuss your particular circumstances.