Personal Guarantees: Watch Out for the Loopholes

Clare Lang

normal during coronavirus restrictions. But this is not free money and the debt will have to be repaid. The time to act to reduce the debt mountain is now, while restrictions have been lifted and most businesses are able to trade as normal.”

One advantage of the loans was that directors were not asked for personal guarantees, but Ms Lang warned that did not mean they could not be held liable.

She added: “If the loan cannot be repaid, the company may be insolvent, responsibility falls to the creditors and not the shareholders. If the company cannot repay the loan, a liquidator may look into where the loan was spent and directors may be deemed personally liable if the funds were spent to pay off other debts as this would be deemed money of the company.

“The important thing for any director to do in the event that they cannot start paying these loans back is to ensure they are up front and transparent with the Insolvency Service and lenders,” she said. “This was not free money. It was only ever intended to keep businesses going through lockdown. These debts have to start to be repaid or they will become the same as any other bad debt – with directors held liable.”

The Insolvency Service has taken action against businesses abusing the financial support including disqualifying a director for 12 years.

Marina Akram Creditors often deal with disputes by guarantors who question the legality and enforceability of a guarantee following a failure by the principal to pay a promised debt.

Personal guarantees which are vague and inadequately drafted can lead to unenforceable guarantees and/or guarantors being unjustly released from financial obligations.

What is a personal guarantee?

A personal guarantee is a contractual promise to a creditor/lender by the guarantor to be responsible for due performance of the obligations of the principal (i.e. a company) if they are unable to meet its obligations financial or otherwise to the creditor/lender.

A personal guarantee may be used in a range of situations, including but not limited to: • Bank loans; • Overdraft applications; • Trade Creditor Applications (mainly used by suppliers); • Landlords may use them as regards to tenants.

Conditions of a valid guarantee

1. The guarantor’s obligation is a secondary obligation which is conditional on the existence (and usually breach) of the primary obligations owed by the principal obligor, i.e. a company, to the creditor. 2. The basic requirements of a contract governed by English law apply to the formation of a guarantee: i.e. offer, acceptance, intention to create legal relations and consideration if not contained in a deed. 3. A guarantee must be in writing (or evidenced in writing) and signed by the guarantor or a person authorised by the guarantor it in order to be effective (Section 4, Statute of Frauds 1677). 4. Recent case law has made it easier to form a valid guarantee through a series of documents including emails.

The name of the guarantor in an email, where there is both an intention that it is a signature and an intention to contract, will constitute a signature for this purpose. 5. A guarantee can be either be an allmonies guarantee or for specific amounts.

Pitfalls to avoid when obtaining and enforcing personal guarantees

1. Get your primary agreement, terms and conditions and guarantee assessed by a specialist solicitor before sending it to potential customers and guarantors. 2. Guarantee documents often include both a guarantee and a supporting indemnity so that the beneficiary can have the benefit of both. The exact wording of the terms of the obligation must make this clear. If there is any uncertainty, the court will choose the interpretation that is less onerous for the guarantor. 3. To avoid potential undue influence and misrepresentation issues when obtaining a guarantee from an individual, the creditor should give enough time to the guarantor and obtain confirmation from the guarantor they have obtained legal advice if they need to understand the terms of a guarantee. 4. Check if the guarantor has capacity within its company to give a guarantee.

Are they a director, partner, or company secretary of the company? 5. Ask the guarantor to send the original copy of the guarantee and don’t forget to validate the identity of the guarantor by obtaining a copy of their ID.

A personal guarantee is a useful recovery method available to creditors/lenders, hence, the drafting of the personal guarantee needs to be watertight. Ambiguous drafting and the lack of key clauses can lead to a signed guarantee being discharged by the Courts. For further advice, please contact Marina Akram at Silverback Law, Commercial Litigation team on 0844 967 2700 or marina.akram@silverbacklaw.co.uk