Personal Guarantees by Directors - Independent Legal Advice

05/06/2018
Personal guarantees by directors of a company are often required by lenders when that company borrows a large sum of money, whether for the purpose of buying a property - in which case the money would be a mortgage loan - or some other reason.

If the company defaults on repayments, the lender can pursue any of the company's directors who have personally guaranteed the loan and if more than one director is involved, the lender can pursue any director for full repayment under the principle of joint and several liability.

Although director guarantees are commonplace in the lending world and mostly do not end in disaster for signatories, getting independent legal advice is invariably required because anyone giving such a personal guarantee must be made aware of the potentially ruinous consequences if things go wrong.

Additionally this advice can result in you choosing to query a guarantee itself if there are grounds that it is in any way unfair.

This article examines personal guarantees by directors and the importance of independent legal advice and looks at:




If you're a director and are looking to provide a personal guarantee for your company taking up a mortgage to buy property, our solicitors are fully qualified to provide Independent Legal Advice and we offer:

  • Face to Face or Skype calls to suit your circumstances
  • Out of work hour meetings
  • Fixed fee - agreed up front with no hidden extras

Our solicitor will fully explain the implications of entering into the mortgage agreement and the risks you need to be aware of.

Call us now to discuss further on 0333 344 3234 (local call charges apply).

* Need to complete quickly? We can help at no extra cost


    1
    What is a Personal Guarantee?
A personal guarantee is when you give a legal promise to repay credit issued to your business for which you serve as an executive or partner.

Providing a personal guarantee means that if the business becomes unable to repay a debt then you are personally responsible - you're agreeing to act as guarantor for the debt obligations of your company.

The personal guarantee provides an extra level of protection to credit issuers, who want to make sure they will be repaid.

Personal guarantees are used in credit deals to provide funding for businesses. It's often that small business founders use a personal guarantee because they've a vested interest in their company's launch and subsequent business development. They'll often already have made a substantial personal investment in their company and a personal guarantee can secure additional capital.

A company then has to pay creditors monthly instalments rather than generating capital for equity investors.

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Personal guarantees are not used where a business consists of a sole trader or a partnership (except for Limited Liability Partnerships (LLPs)) because any debt of the company is deemed as a personal liability of the business owner/s so a further guarantee is superfluous.


    2
    What are the Pros and Cons of giving a Personal Guarantee?

Pros

  • Can increase the chances of getting essential financing for your business, which can make the difference between your business staying afloat or going under. It also might mean you can buy a home to live in!
  • Can improve the terms of funding because lending will be based on both your business's profile as well as your own.
  • Securing finance can provide a positive signal to your backers.
  • The financing may prove crucial for your company's continuing growth and for reaching its potential.

Cons


  • You might see your own finances seriously affected in negative ways because of the potential threat to your assets.
  • In a worst-case scenario you might be looking at personal long term financial problems, even bankruptcy. Bear in mind that your creditors can come after your current accounts, savings accounts, your property and your cars.

    3
    What's the process for providing a Directors Guarantee to get finance?
Any lender considering the provision of finance to your company on the strength of your personal guarantee will examine your own personal credit history and profile at the start of the process, following receipt of your application along with credit information for your business.

It may be that you run a small business which has little or no credit history of its own for consideration, which explains the importance of scrutinising your own profile as the primary basis for underwriting any funding.

You have to provide your National Insurance (NI) number for a hard credit enquiry and information on your personal income and possibly detailed information about your personal assets.

You might be expected to give a personal guarantee even if you're just applying for a business credit card.


how-to-get-out-of-a-personal-guarantee.pngYou should bear in mind that if your spouse or partner owns or controls a significant fraction of your business, they might be expected to provide a personal guarantee as well - you would then both sign a joint personal guarantee.

Once you've made your application, your lender scrutinises all the details mentioned and if it decides that it is happy to underwrite the financing in principle, it will invite you to a private meeting with the lender/lender's representative such that you are told of the full extent of your liability and are warned of the potential risks regarding the personal guarantee contract it has drawn up and is offering for your signature.

Questions you should ask yourself regarding the lender's contract

Even though you have to take independent legal advice, you owe it to yourself not to rely on this alone - you need to ensure as much as possible that you're comfortable with the contract's terms yourself.

To that end, you should ask yourself questions such as:
  • How does your contract suggest creditors will enforce the guarantee?
  • Will they serve notice or can they seek payment on demand?
  • What exactly will constitute a default?
  • Do terms allow for any remedy period?
  • How are your net assets assessed and is this likely to change after you've given your guarantee?
  • Does your contract provide that creditors exhaust every other avenue before making demands on you?
Always remember that in law, if you personally guarantee a debtor, even if the debtor declares bankruptcy and is discharged from responsibility for a debt, you as a guarantor still remain liable for it.

independent-legal-advice-for-guarantors.png
The lender will also request that you take separate independent legal advice  -  and if your spouse/partner is to sign a joint personal guarantee, they'll have to take their own separate independent legal advice in addition, to ensure they're not under 'undue influence' etc. - regarding the contract and provide confirmation, from your solicitor, of the advice given. If you do not have the meeting with the lender and prove that you've taken independent legal advice, then it's highly likely that any contract you subsequently agreed to would be unenforceable in law, so any lender will invariably refuse to grant you the credit you're seeking.

The device which enables you to prove that you've taken the required independent legal advice (click to find out more) is what's known as an Etridge Letter (click to find out more); it takes the form of a document from your solicitor summarising the advice given regarding the implications of the contract, as stated, and signed by your solicitor.

Why is it called an Etridge Letter?

The name comes from a precedent in case law, RBS v Etridge, where the House of Lords confirmed that, subject to a number of exclusions, a lender should be put on notice of undue influence and/or misrepresentation where a wife is to guarantee the debts of a company and the shares are held by both the husband and wife.

After the lender has received and is satisfied with your Etridge letter, you can sign the relevant deed and then the lender can provide the finance.


    4
    What matters within the Personal Guarantee contract will your solicitor be likely to advise you about?

The Personal Guarantee Should Not Be an Indemnity

The personal guarantee should not be an indemnity – which is in itself a primary obligation to pay further damages to reflect a lender’s loss – and it's not contingent on the obligations of the borrower. Your solicitor, when examining the detail of a contract which claims to be a guarantee, will look to be clear with you concerning whether you'll be acting as an indemnifier, a guarantor, or a mixture of the two.

independent-legal-advice-solicitorIs your Personal Guarantee to be supported by a security or not?

Your solicitor will brief you as to whether or not your guarantee is to be supported by a security, which might be a charge over your own home. Any security you put up makes it easier for your lender to enforce against you in the event of a default.

Is your Personal Guarantee enforceable?

Simply put, your solicitor should advise you as to whether your contract is legally sound and, whether, if circumstances move against you, the lender can pursue you personally for default on your company's debt repayments.

Gordon Ramsay: falling foul of a signature machine

Celebrity chef Gordon Ramsay's signature was reproduced on credit agreement documents by his father-in-law using a signature machine in order to raise credit.

When Chef Ramsay contested the legality of his father-in-law's actions, the High Court ruled against him, stating that the signatures were effectively binding on the basis that the father in law acted as agent throughout a long-standing business relationship.

What are the limits if any of your liability?

Your solicitor should brief you as to your full liability in the event of the lender calling on your personal guarantee.

On the strength of this advice, you might even wish to consider negotiating with your lender regarding capping your liabilities, which would involve redrafting the contract if you were successful in your bargaining. This strategy is highly likely to involve further legal costs however - and further advice - and you should seek appropriate advice before attempting this.

The above list is by no means a complete or definitive list of all the possible subjects which you might be advised about by your solicitor; the actual advice you receive depends on the individual circumstances of your case.


    5
    Are there any alternatives to providing a Personal Guarantee to back your company's financing?
If you own (or are a director of) a well-established business with a significant commercial credit profile, then you may be able to obtain credit without giving a personal guarantee.

If you don't, then it's always worth investigating alternative funding options that might be available.

There is a growing variety of routes to finance available to businesses in the UK, and many are specifically designed to meet the needs of small businesses that are faced with significant financial pressures, and whose directors are struggling to find the credit terms they need.

You should consult independent and impartial experts not least because you fully need to know the implications of any deal you do to raise finance.


    6
    Can you obtain Personal Guarantee insurance against your lender making a call on you?
personal-guarantee-contract
Yes, insurers do insure against Personal Guarantees/Director Guarantees being called on, although you should research with insurance companies as to whether they will insure your individual case.


    7
    What if you sell your business for which there's an outstanding Personal Guarantee?
In the event you sell your interest in a business, you need to make sure you get your personal guarantee released. If you are not properly released from the personal guarantee you will still be held liable if the lease or loan goes into default. You may be required to pay off the lease as part of the sale of the business.


    8
    Can you get out of a Personal Guarantee should your business become insolvent?
No - you should be prepared for the real risks you are taking on, hence the necessity for independent legal advice.

As stated previously, you should consider renegotiating a contract at the drafting stage if feasible and/or taking out personal guarantee insurance.

Failing that, you'll have to pay the debts you're called on to pay or face going bankrupt.

If you require further reading on this, please examine Bank of India v Riat [2014] EWHC 1775 (Ch), a particularly important legal case which illustrates quite how difficult it is to shirk responsibility for a personal guarantee given to repay debt.


    9
    What's the process when a lender calls on your Personal Guarantee?
The process varies according to the particular creditor and how much is being called upon. However, what normally happens is:
  • Creditor issues a Statutory Demand
    This gives you 21 days to either settle the debt or reach an agreement to pay. If this is not possible, the creditor can start bankruptcy proceedings (providing of course that the debt exceeds £5000 (this is usually the case with personal guarantees).

  • What is a Statutory Demand?

    A statutory demand is a written claim for a debt against a company or individual from one or more of its creditors. It's a method used to recover a serious debt, and is usually the first step before issuing a winding up petition (for a company), or bankruptcy (for an individual).

    A statutory demand must be taken seriously. It costs a creditor £200-£500 to issue a demand via a solicitor, so you can be sure that they are intent on recovering their money.

    If the debt remains unpaid at this stage, it might result in compulsory liquidation which normally spells the end of your company. Additionally, you can expect to be investigated personally by the Crown which will examine if you traded wrongfully, took took credit without reasonable prospect of repaying the debts, and failed to submit accounts or committed a number of other offences.

    In the worst-case scenario, you might face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988. HMRC is entitled to recover unpaid Pay As You Earn (Income) Tax from directors if there's proof that you wilfully failed to operate the scheme. You can also be banned as a director for up to 15 years.

  • The creditor can apply for a County Court/High Court Judgement
    The usual results will be that they then either get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.

You MUST get legal advice if a personal guarantee is called in, not least to check that it's legally sound. You should then talk directly to the creditor. Legal action can be lengthy and costly whereas most creditors will consider a negotiated settlement if it makes commercial sense.


If you're a director and are looking to provide a personal guarantee for your company taking up a mortgage to buy property, our solicitors are fully qualified to provide Independent Legal Advice and we offer:

  • Face to Face or Skype calls to suit your circumstances
  • Out of work hour meetings
  • Fixed fee - agreed up front with no hidden extras

Our solicitor will fully explain the implications of entering into the mortgage agreement and the risks you need to be aware of.

Call us now to discuss further on 0333 344 3234 (local call charges apply).

* Need to complete quickly? We can help at no extra cost


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