Love and loans (Part 2) - Personal Guarantees

A layman’s guide to Personal Guarantees.

A personal guarantee is an agreement or promise by one party to be liable for the debts of another.

In order to reduce their business risks, a bank, trade creditor or anyone else providing finance or credit to a family member or a company controlled by a family member may ask you for a personal guarantee of the family member’s debts or their company’s liabilities.

In some instances the personal guarantee may be unsecured; however, sometimes the credit provider may seek some form of additional security e.g. over your house or personal assets in order to secure the performance by the family member of their or their company’s contractual obligations.

Where personal guarantees are provided by you, you may become personally liable for the repayment of your family members debts. If the family member or their company does not repay the loan as agreed with the credit provider, and you have agreed to offer an asset such as your home as security for that loan, you may lose your house.

As a general rule, you ought to avoid providing your personal guarantee or agreeing to allow a security interest to be registered against your personal property; however, this may not always be possible and, notwithstanding the risks involved, the emotional ties may be such that you may want to do whatever you can to assist the family member.

If you must, then the following points ought to be taken into account.

1.   Read the guarantee document

It may seem obvious; however, you must read the guarantee document yourself. Don’t just rely on your professional advisor to do it for you. You need to understand:

·        what is being expected of you;

·        that the guarantee does not go beyond what you have been asked to provide;

·        what will trigger the guarantee (usually a breach of a loan covenant);

·        what are the risks and the consequences for you should such an event occur; and

·        how can you terminate the guarantee?

2.   Independent Legal Advice

Whenever there is “Love” or “Family” involved in a loan transaction or the provision of a personal guarantee, the lawyer acting for a prospective bank, trade creditor or anyone else providing finance or credit, will want to, or at least ought to, ensure that you are fully aware and informed as to the obligations you are assuming when you agree to provide your personal guarantee.

In some instances, you may be required to sign a document acknowledging that you have been provided with the opportunity to obtain your own independent legal advice even though you may have elected not to. This is as much for their benefit as yours as at some point in time, the party seeking to rely on your personal guarantee may need to demonstrate that there was informed consent at the time the guarantor signed the guarantee.

Don’t rush in. Sometimes there may be time imperatives e.g. an imminent property settlement; however, it would be unwise of you to waive your right to obtain your own independent legal advice. Since the guarantor is assuming some of the business risks in the transaction, it is not unreasonable for you to expect the beneficiaries of your personal guarantee (which is arguably both the lender and the borrower) to pay the cost of your independent legal advice.

If English is not your first language, ask for an interpreter to be present when you are receiving your independent legal advice. If the family member or loved one for whom you are providing your personal guarantee accompanies you when you are about to receive your independent legal advice, ask them to leave you alone with your legal advisor.

If you feel uncomfortable doing this, ask your lawyer to explain to them why it is as much to their advantage as it is to yours, that the advice you receive is truly independent.

3.   What is the extent of the personal guarantee?

The wording of the guarantee will dictate whether it is secured or unsecured, and what debts may be claimed. The wording of some guarantees may state that the guarantor will be liable for “all monies” due and owing by the primary contracting party. For example, this may be the case when you are providing a directors guarantee for a family company.

However, the term “all monies” is unclear and in essence could apply to anything e.g. including any past, present and future debts of the company. The normal rules of contractual construction apply to written guarantees and uncertain terms ought to be avoided. This is where legal advice can assist you in understanding and negotiating the terms of the guarantee so that you are sure about the limitations of your liability.

4.   Risks

Even if the guarantee is unsecured, if a demand is made under the guarantee and the debt is not paid, the creditor is able to seek judgement at Court for the sum claimed (as specified in the guarantee, which may include their legal costs as well) against the guarantor personally.

If judgement is obtained, the creditor will be entitled to use standard enforcement methods e.g. to apply to the Court for a warrant of seizure and sale (i.e. a court order) for the sheriff to seize non-secured property from your home or business (if you own the business) and to sell those items to recover their costs and then pay the creditor the amount listed in the warrant.

Depending on the circumstances, the creditor may seek a warrant to sell a judgement debtor’s interest in real estate. As a last resort, if the judgement debt remains outstanding, the creditor may elect to issue bankruptcy proceedings against the guarantor personally.

5.   Joint and several guarantee

A joint and several guarantee means that each guarantor (e.g. the directors of a company), are liable, both separately and jointly, for the full debt owed by the company. If you are a “joint and several” guarantor, you cannot assume that you will only be liable for a portion of the debt if there are two or more guarantors, you will be liable for the whole of the debt.

6.   Termination of guarantee obligations

There may be ways to terminate your personal guarantee; however, generally speaking, a personal guarantee cannot be terminated at will by the guarantor. In certain circumstances, a personal guarantee may be set aside by a Court; however, it is not a straightforward exercise and could incur substantial legal costs.

You may be released from a personal guarantee if you have obtained the consent of the creditor or lender and potentially also the debtor, depending on the wording of the guarantee document and any surrounding obligations.

As a director of a company that has provided a directors guarantee, you also need to be aware that ceasing to have a relationship with the company or having resigned as a director does not automatically terminate a guarantee.