A Guide to Personal Guarantees Part 2

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In my last blog I looked at the nature of personal guarantees, explaining what they are and how they work. In this blog I will consider what you should do if asked to give a personal guarantee, the advisability and requirement for legal advice before signature, and the position where legal advice was not taken.

Points to consider

1. Explore other options you might have that would allow the business to borrow money without you being personally liable. Will the bank accept alternative security?

2. When you give a personal guarantee the bank will often ask for a charge against your house to secure repayment. Think carefully whether you are prepared to put your family home at risk before agreeing to this.

3. Take legal advice to ensure you fully understand the implications and consequences of giving a personal guarantee. Never just sign a personal guarantee.

 4. If you can avoid giving a guarantee, do so, because it can have severe implications for your personal finances (including bankruptcy) if the company can’t repay.

5. Where your landlord is asking for a personal guarantee it is usually best to offer a rent deposit instead.

 6. A personal guarantee is usually a continuing security, which means that there is no termination date unless you are prepared to pay the bank the full outstanding balance of the loan.

 7. If you have to give a personal guarantee, cap your liability to an amount you can afford but always remember that interest and costs can be added to the fixed amount.

8. Check whether you have already signed a personal guarantee with the bank as they are cumulative. This means that if you sign a guarantee with a limit (say of £10,000) and the bank asks you to sign a new guarantee (perhaps because the business needs to increase its loan) with an increased limit (say £20,000) then unless the bank expressly releases you from the first guarantee in writing, your liability will now be £30,000 not £20,000.

9. If you have any personal savings with the bank these are in danger if the lender calls in the debt.

10. Consider that if any co-directors have also given the bank a personal guarantee this does not mean that you can insist that everyone pays the bank in equal proportions. The bank will go against the director who they believe has the most assets. It will then be left to the guarantors who have paid more than their share to attempt recovery from the other co-guarantors.

Independent Legal Advice

I am often asked if a personal guarantee is unenforceable if independent legal advice was not taken before it was signed. The answer, as with many things, is “it depends”.

It is always worth looking to see if the bank or other person or organisation taking the guarantee has followed their own procedures. It is now rare for a bank or other financial institution to make a mistake, but they can happen. They must prove by their paper trail that they have complied with their own procedures. Provided they can show this, they will usually be able to enforce the personal guarantee.

In the recent case of National Westminster Bank plc v Alfano and others, the High Court judge found that NatWest had been meticulous with their paperwork, had followed their procedure, and the guarantees were enforceable. The bank’s policy was that independent legal advice was not necessary provided that the guarantor was fully involved in the business concerned, the guarantor had an opportunity to read the guarantee at a meeting with the bank official, and the guarantor signed a waiver saying that they had been advised to obtain independent legal advice.

In this case all but one of the guarantors were directly involved in the business, and chose not to take independent legal advice, and the one who was not involved had obtained independent legal advice. If you have given a Personal Guarantee, but had no involvement with the business concerned, and have not obtained independent legal advice, then  there is a very strong possibility that the Personal Guarantee will be unenforceable.

For the organisation taking a personal guarantee, warning alarms should always sound if they are looking to take a guarantee from someone who is not a director or shareholder  of a business being guaranteed. So the wife or husband of a director should always be asked to obtain independent legal advice before signing any personal guarantee, and the guarantee should not become binding unless and until that independent legal advice has been taken. This is all based on the law of undue influence.

Normally it is for the person alleging undue influence to prove it, but in certain cases there is a binding presumption of undue influence. But these cases are quite limited, such as doctor and patient, parent and child, solicitor and client. Husband and wife is not such a case of presumed undue influence, but the courts have held that the nature of the relationship should put a bank on notice, and the bank should take certain steps such as insisting that the wife should take independent legal advice.

Nigel Musgrove

Business and Litigation Solicitor

 Tel: 0845 003 5639

For free advice on this topic please call us on 0845 003 5639.