When applying for business finance, lenders often insist on a Personal Guarantee being given as a form of security for the loan. Personal Guarantees may also be requested by landlords and sometimes even suppliers. However, before agreeing to grant anyone a Personal Guarantee, it is vital that the guarantor (i.e. the person giving the guarantee) is aware of exactly what they are agreeing to individually.
In fact, in a finance situation, lenders often insist that a guarantor take independent legal advice to extinguish any future argument that the guarantor did not understand the terms or practical implications of entering into the Personal Guarantee.
It is a legal principle that a limited company is a separate legal entity with its own legal personality. A company can enter into contracts on its own behalf and is responsible for its own liabilities. The directors and shareholders of a company are generally therefore not liable for the debts and obligations of a company even if the company is in default.
Given there is this separate distinction between the company itself and the persons responsible for running it, lenders, landlords and suppliers may want to reinforce the obligations of the company by putting in place a Personal Guarantee. But what does signing up to a Personal Guarantee mean?
By entering into the Personal Guarantee, the individual (usually a director of the company but not always) is agreeing to guarantee that the company performs its obligations. If the company defaults in its obligations, the individual has agreed to be personally liable and must instead fulfil the company’s obligations. For example, where a company has taken out a loan and the director has given a Personal Guarantee, the director becomes personally liable for the loan and will need to repay the loan if the company fails to do so.
When giving a Personal Guarantee, an individual is putting their own assets on the line. If payment is not made when called upon, the individual risks being taken to court for the debt. Any judgment can then be enforced against the individual’s assets, including their home. If there are insufficient assets to repay the debt, the individual could be made bankrupt and the consequences of bankruptcy can affect an individual for many years afterwards.
Important terms to look out for in a Personal Guarantee include whether or not it is limited in scope or whether it is an “all monies” guarantee which means it would cover not just the current liabilities of the company but also ones incurred in the future. Personal Guarantees also sometimes include a cap on the amount the guarantor is liable for and if one has been agreed, it is important to ensure that this is set out in the agreement. Sometimes a Personal Guarantee does not require action to be taken against the company first before action is taken against the individual and it is important to be aware of this if this is the case.
A Personal Guarantee is a serious commitment and should not be entered into without an understanding of the implications and consequences. If you need legal advice on a Personal Guarantee then please contact corporate and commercial Solicitor Michael Lam on 0116 402 7240 or by email at email@example.com.