If you have ever looked at raising finance for your own company your lender may have mentioned that they require you to provide a “personal guarantee”. This is an important part of the lender’s overall security package and its wide-ranging implications should not be overlooked.
This is increasingly the case for small owner managed companies where the same individuals are the owners and the directors. In fact, we are currently seeing a significant increase in such requirements, particularly where new companies are being formed for the sole purpose of holding property for the lettings market.
In such a scenario the lender’s loan will be to the company, and not to the individual. This is a fairly risky strategy for the lender to take since, at law, the company is a separate legal entity. Even though it is owned by its shareholders the lender’s only contractual cause of action in the event of a default is against the company itself. If the company has few assets or there is insufficient equity in any property, then the lender would face a shortfall in recovering monies owed to it.
Needless to say, no lender would want to be in such a position. So, a personal guarantee plugs the gap as it effectively says that the person providing it “guarantees” that the company will perform its obligations. So, in the case of a company default, the individual will be liable to pay.
Law of guarantees
Although the law of guarantees is complex, and no two guarantee agreements are the same there are several common themes.
Most take effect as both a “guarantee” and an “indemnity”. The words sound similar, but in legal terms carry separate and distinct meanings, the effect of which is that any losses suffered by the lender can be recovered from the guarantor. Keep in mind that this arrangement is to protect funds loaned.
Similarly, a guarantee will provide the lender freedom to recover monies either from the personal guarantor or from the company. So, if the company is heavily indebted elsewhere, or its assets may be difficult to sell, it can seek recovery directly from the individual rather than first approaching the company.
There are many other provisions contained in personal guarantees which anyone considering entering into one should be aware of. With this in mind, responsible lenders require personal guarantors to seek independent legal advice before they take on such obligations.
We are aware that occasionally lenders suggest that the guarantee is simply signed “in front of” a solicitor. This is rarely the case, as any solicitor involvement will almost certainly require confirmation that advice has been given.
How can we help?
At Pinney Talfourd we frequently advise individuals on their personal guarantee obligations before reporting to the lender. As a guarantee requirement often arises late in the process, we often advise at short notice to help prevent unnecessary delays in the lending process.
If you require any assistance with personal guarantee arrangements, then please contact the Pinney Talfourd Commercial Department for further guidance.
This article was written by Edward Garston, Partner in the Company & Commercial Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of November 2020.