Posted: Monday, 18 August 2014 @ 12:48
In my last blog in the series on personal guarantees, I will look out how you can bring a personal guarantee to an end, and what to do if the creditor takes action against you under the personal guarantee.
Discharging a personal guarantee
The only sure way to bring your liability under a personal guarantee to an end is either to ask the creditor, usually a bank, to release you in writing (don't hold your breath) or if that fails look for a provision in the guarantee document allowing you to terminate on notice. This will cap your liability under the personal guarantee to the amount owed by the company at the time the notice takes effect. You should only do this where the debtor company no longer requires the facility, or you cease to be a director/shareholder, as inevitably the bank will want the money back. Tactically, notice should be served when the business owes the bank as little as possible or preferably nothing at all.
It is vital that if you cease to be a director, or sell or leave the business, you identify what personal guarantees you have given and preferably obtain a release from the bank/creditor or if that is not possible then obtain appropriate indemnities from the continuing or new directors.
Tactics to use if a personal guarantee is called in
If the worst happens and the personal guarantee is called in by the creditor/bank when your business doesn’t have the funds to repay it, for example if the business goes into administration, you should take early advice and carefully consider the options available to you, as the implications of the bank taking legal action can be severe.
Is it enforceable?
• Does the creditor have a signed copy of the personal guarantee?
• Was independent legal advice given to you before your signed the personal guarantee? If not, were you actively involved with the business concerned?
• Has the creditor complied with any agreement to take securities?
• Has the creditor acted in a way prejudicial to your position without your consent?
It may be possible to challenge the legality of the personal guarantee, but this will depend on the precise circumstances, and the terms of the personal guarantee itself.
Can you afford to pay or offer a realistic payment plan?
If you have equity in property or other assets sufficient to repay the full amount, then the room for negotiation of a lower figure in full and final settlement is more difficult, but not impossible. If you have little means to repay then the bank will take this into account during negotiations.
Remember that jointly owned assets, such as a matrimonial home, are not safe from enforcement. A creditor can, after obtaining a court judgement for the guarantee debt, ask the court to place a charge over your share in the jointly owned property. They would then have the option of making a separate application to court for an order for sale of the property if they cannot reach agreement with you on payment of your liability.
It is tempting to try and place your assets beyond the reach of creditors, such as by transferring your interest in property to a spouse or third party. But remember, there are certain anti-avoidance measures in the Insolvency Act which allow such transactions to be set aside in the event of your insolvency, if they were for an undervalue.
If you discharge the guarantee in full and there were co-guarantors, you may be able to recover from them their share of the total guarantee. The same applies if you pay the bank more than your share. But the opposite is also possible, so if the bank goes after one of the other co-guarantors, that co-guarantor may come after you.
It is a mistake to assume that personal guarantees to banks are always enforceable. It is true to say that these days the high street banks usually have watertight paperwork and have covered off any potential loophole, but a lender can get it wrong with the result that the guarantee in unenforceable.
So do not assume that all bank guarantees are enforceable. When faced with a demand under a personal guarantee, it is best to take urgent legal advice before taking any steps towards negotiation with the lender.
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.