11 August 2017 by

Understanding the risks of entering into a personal guarantee

Directors will often be required to give a personal guarantee as security for a loan provided by a lender to their company. This means that the lender will have direct recourse to that director personally if the company defaults on its debts.

Often these guarantees are drafted heavily in favour of the lender and designed to give it maximum protection. It is crucial therefore for directors to take legal advice and carefully consider the risks to them before signing on the dotted line.

The most common risks and considerations required by directors are set out in the checklist below:

  • Consider whether the company itself can provide security over its assets, this may mean that a personal guarantee from the director is not even necessary.
  • If personal assets are insufficient to cover the debt owed, the director could be made bankrupt and disqualified from being a company director in the future. The guarantee is a promise to repay the company’s debt, a failure to do so allows the lender to obtain judgment against the director personally as well as the personal assets.
  • Most personal guarantees are repayable on immediate demand and the creditor can ‘call in’ the debt at any time at its discretion.
  • If the guarantee is secured over personal assets then the bank can sell the assets to meet the debt, without needing to go to court. Often the assets include a director’s family home. In these cases any co-owner would also need to take independent advice.
  • Particular care is needed concerning provisions stating that the guarantee is ‘continuing’ and is in relation to ‘all monies’ owed by the company, as this can cover future debt and accrued interest.
  • Personal guarantee documents will also often include an ‘indemnity’ requiring all losses suffered by the lender being paid by the director. This is usually a free standing obligation, enforceable in its own right and unaffected by the discharge of the personal guarantee. Where possible providing an indemnity should be avoided.

In the event that a personal guarantee is called upon immediate legal advice is advised. There may be defences available of grounds to negotiate with the lender.

If you require advice on this matter or any corporate or commercial law issues please contact Sej Lamba on 020 7288 5756 or by email at SehajLamba@boltburdon.co.uk.

You can also contact one of our other solicitors in the Corporate and Commercial team here.

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