What is a personal guarantee?

Personal guarantees are often requested when starting a business, obtaining funding from a bank as a form of security or the signing of a lease.  It is also common practice for directors of limited companies to be asked to provide a Personal Guarantee in circumstances where a supplier is refusing to supply goods until such a time a Personal Guarantee is provided.  A Personal Guarantee is effectively a legal promise and obligation to pay a debt of a third-party should that third-party fall into financial difficulty and be unable to pay.

For a Personal Guarantee to be effective and binding as to its terms, it should and is usually recorded in writing, its conditions clear, unambiguous and signed by the parties intending to be bound by its terms.  The document should also make clear on the face of it that it is a ‘Personal Guarantee’.


When do personal guarantees become enforceable?

Once the third-party (on whose behalf you have provided a legal promise to pay) has defaulted and/or is unable to repay the debt, it is at that point the person or entity (usually a bank) can enforce the terms of the Personal Guarantee and pursue you for payment.  Subject to the terms of the Personal Guarantee, this could include the immediate issue of court proceedings to recover the amount outstanding, plus interest and legal costs.


Can I challenge a personal guarantee?

The answer is yes.  The facts and circumstances will differ in each individual case.  However, in order to successfully challenge a Personal Guarantee some of the following tasks must be undertaken, reviewed and considered:-

  • The circumstances of how and why the Personal Guarantee came into existence and was provided by you.
  • The bargaining and negotiating power of each party at the time the Personal Guarantee was offered and/or entered into.
  • The terms of the Personal Guarantee to include whether you were given the opportunity to seek and obtain independent legal advice before entering into the agreement.
  • The contents of the Personal Guarantee itself. Are the terms clear, unambiguous and does the document actually state that it is a Personal Guarantee.
  • Evaluating whether any of the terms contained within the Personal Guarantee could invalidate the document.
  • Reviewing the payment terms, enforcement and steps the bank is able to take against you that should be set out in the Personal Guarantee to ensure that the bank is not operating outside of the prescribed terms of the agreement.
  • Evaluating whether there has been any misrepresentation, duress or undue influence by the parties at the relevant time the Personal Guarantee was signed.

The above is not intended to be an exhaustive list, but are some the defences and/or areas that would need to investigated when dealing with a bank seeking to enforce a Personal Guarantee.


Must I pay?

This is a wide question and much will depend on the individual facts of each case.  When presented with a claim pursuant to a Personal Guarantee this can and usually is a very stressful and traumatic time.  It is therefore essential that if you find yourself in such a position that you take the correct steps moving forward in order to protect your position without delay.

This firm regularly deals with, has experience in and works with its clients to find solutions and/or settlements to any personal liability claims they are facing.  Even if a Personal Guarantee is valid and enforceable, this firm can work with you in liaising with and convincing the bank to take a pragmatic and commercial approach to matters without the requirement for the bank to issue proceedings.

If you have any questions or queries arising out of this article or Personal Guarantees, then please do not hesitate to contact us and we will be more than happy to discuss and assist you.