Personal guarantees

Banks have commonly required business owners of small and medium sized businesses to provide personal guarantees on loans made.  You may have to repay the loan if the borrower defaults - and because of this lenders require guarantors to take independent legal advice on the implications and risks - we offer this advice.

How we can help

We explain in easy language how the personal guarantee operates and the implications.

In some situations we find borrowers only want us to quickly explain the risks, so as to satisfy the lenders requirements. This would mean our independent advice costs will be at the lower end of fixed fee options but carries risks.

However, fully understanding the risks and potentially negotiating on a cap to the guarantee, a time limit or other protections is generally the better option but does typically involve an amount of additional negotiation with the lender, so may mean higher legal advice fees.

Usually, where a primary asset of the guarantor is jointly owned, typically a property, banks insist the guarantor and any property co-owner both take independent legal advice and that both are guarantors. This reduces a co-owner’s ability to challenge the guarantee’s enforceability, by arguing undue influence or misrepresentation.

What are the legal risks of providing a personal guarantee?

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. If the company defaults on its debt repayments. the lender has additional security in the form of the personal guarantee.  The guarantor risks his or her home and personal assets if the borrower defaults and fails to repay the loan.

Typical clauses in personal guarantees that catch out guarantors include:

• Repayment on immediate demand.
• No power to negotiate repayment terms.
• Joint and several liability - If several directors jointly and severally give the same bank a personal guarantee then the bank does not have to take action against, i.e. chase, all directors but can claim the whole amount from any single guarantor.
• Security for the personal guarantee - often the bank will insist on taking security over the guarantor’s assets. Then the bank can sell the guarantor’s assets to meet the 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.
• Indemnity - the lender may include in the Personal Guarantee an indemnity which means the lender will have the right to enforce the personal guarantee without taking any legal action against the primary borrower.

How to limit risk under a personal guarantee

There may be an opportunity for a guarantor to limit risk under the personal guarantee. The opportunities will vary from company to company.  Options for limiting risk include:

• Access to business records - provides a form of early warning if the guarantor is not a director.
• Veto rights - giving the guarantor the right to veto certain business decisions which the guarantor may consider increases the risk of the company performing badly and putting the guarantor at risk.
• Cap on amount or time - limiting the overall guarantee amount or having an automatic expiry date on the guarantee.

We are always happy to discuss your requirements. Please get in touch. 020 7438 1060.