What is a personal guarantee?

A personal guarantee is a contractual obligation of an individual to pay the debts of the borrower, usually a limited company, when the borrower cannot or does not do so. A guarantee can be an obligation to pay a sum of money in the event of the borrower’s default or it can be an obligation to ensure that the borrower meets its obligations, which is called a “see to it” guarantee. This distinction can affect the amount the lender can ultimately claim.

What to do if I receive a claim for payment on a personal guarantee?

If you receive a claim for payment on a personal guarantee, there are several steps you should follow:

1. Validity

The first thing to do is check the validity of the guarantee.

A guarantee has to be evidenced in writing and signed by the guarantor or someone else if that person was directed to sign by the guarantor.

Like any other valid contract, a guarantee requires consideration which means that something of value has been given by the person receiving the benefit of the guarantee. Most often consideration is provided by the lender agreeing to lend money to the company. If the guarantee is executed as a deed, consideration is not necessary.

2. Check the demand

Some guarantees are drafted in a way that requires service of a formal demand before any liability arises under the guarantee.

Whether or not that is the case, the guarantor will receive a demand for payment in some form or other and it is important to check that the demand covers that which was originally guaranteed. For example, you may receive a demand in respect of monies owing under a recent banking facility and yet you thought that the guarantee related only to a much earlier facility, which has been repaid.

The starting point is always the contractual wording. However, when interpretating contractual wording, the courts will look at all relevant contracts, and surrounding circumstances, and will attempt to reach a conclusion that is consistent with business common sense.

3. Misrepresentation

Examine all records, such as emails and letters and any other notes made at the time the guarantee was given. If the guarantee is procured because of a material misrepresentation, then it can be set aside. Most judges will say that the most common allegation is that the lender that represented the guarantee would be nothing more than a formality, and such claims are treated with a degree of scepticism. However, if there is any written evidence that is consistent with the making of such a representation, then on examination of other evidence it is possible that the guarantee could be set aside.

A fatal misrepresentation would be a misrepresentation as to the state or indebtedness between the borrower and the lender, or misrepresentations as to the taking of other security in relation to the same loan.

4. Misrepresentation and COVID-19 loans

During the COVID-19 pandemic, the government announced that it would provide Bounce Back Loans to small businesses to enable them to access finance more quickly. These Bounce Back Loans are guaranteed by the government and therefore personal guarantees cannot be taken from directors or shareholders in relation to that loan.

There have been a number of instances where it was represented to a company director that there was no personal guarantee in relation to a Bounce Back Loan taken by his or her company. However, if the bank already holds an “all monies” guarantee from the director, which means it applies to any and all obligations existing at the time of the guarantee or in the future, then such a representation would be incorrect because the bank could always claim under the original guarantee.

That would comprise a misrepresentation made to the company when agreeing to enter into the Bounce Back Loan. Depending on the precise facts, this could potentially provide the company with a claim of misrepresentation against the bank which would ultimately benefit the guarantor if successful.

5. Are you also a personal customer of the bank?

If you are also a personal customer of the lending bank, then arguably the bank owes you an obligation of care in explaining the risks and liabilities that you are potentially entering into in signing the guarantee. If the bank breaches that duty, this may provide a defence.

If any of the contractual arrangements could be termed “unfair”, then the Unfair Terms in Consumer Contracts Regulations may assist. These regulations apply only to consumer contracts and have the effect of rendering unenforceable any terms which are adjudged to be ‘unfair’. This is particularly the case if the guarantor is not the business owner or director but is, for example, a member of his/her family, who is also a personal customer of the bank.

6. Family members or other third parties

If you have given a guarantee and you are, for example a family member or other individual with little or no involvement with the company, and you have not received independent legal advice from a solicitor who has been satisfied that you are not subject to undue influence, you may well have a defence to any claim on your guarantee. You may be registered as a director and may have some shares in the company but even in those circumstances you may still have required independent advice for the guarantee to be enforceable.

7. Free will

A guarantee will be held to be invalid if it has not been entered into by the guarantor of his or her own free will. Therefore, a guarantee entered into under duress would not be enforceable. However, it should be noted that a lender who says “if you do not sign a guarantee, we will enforce our contractual rights under the original loan facility” is not exercising duress. The mere threat to enforce valid contractual rights cannot amount to duress.

However, if such a threat is made because the bank has stated that the borrower is in default of the loan facility, but which, on a careful examination of the operation of the account, turns out to be untrue, (for example, because the bank has been overcharging interest for a long period of time which has incorrectly triggered default provisions), the threat to enforce what are in these particular circumstances non-existent contractual rights could amount to duress.

8. Has the creditor changed anything after the original loan and guarantee?

This will not usually apply in circumstances where the guarantee is a standard-form document from a major bank. However, if certain things have happened after the guarantee has been given, such as increasing the amounts lent to the borrower, or releasing the borrower, such events essentially change the nature of the risk of being guaranteed. The law can step in and discharge the guarantee entirely. This does require careful examination of the terms of the guarantee and of the conduct of the parties.

Next steps

If you have received the unwanted news from the bank that the guarantee is being called, seek legal advice if your liabilities are unclear. It may be possible to challenge your personal guarantee claim and potentially save you a significant amount of money.