Personal Guarantees: An Essential Guide

What is a personal guarantee?

A personal guarantee is a contract between an individual and a creditor (typically a lender or supplier). By signing, you, as the personal guarantor, are agreeing to pay the borrowers debt if it defaults.

Why I am being asked to provide a personal guarantee?

The creditor may feel that the borrower is a potentially high-risk entity. Obtaining a personal guarantee from a person connected to the borrower will mitigate against the risk of non-payment by the borrower. The creditor effectively obtains a secondary payment source, just in case the borrower can’t pay. You, as personal guarantor, will become personally responsible for payment of the debt, in addition to the borrower.

What are the main types of personal guarantees?

There are two main types of personal guarantees;

1. Unlimited personal guarantees: you are liable for all debts incurred now or in the future, plus interest and recovery costs.
2. Limited personal guarantees: your liability is capped at a specific figure or percentage of a debt.

What happens if there are multiple personal guarantors?

If you and another or multiple others sign up as personal guarantors, you will usually have joint and several liability towards the creditor. This means that the creditor can pursue any one of you for 100% of the debt or pursue each of you for so much as they wish, rather than a set equal split.

What are the risks involved?

Some of the risks posed to personal guarantors are as follows;

1. Personal asset exposure: Your family home, savings, vehicles, and investments are all at risk.
2. Credit rating impact: A default can severely damage your personal credit score, affecting their future ability to borrow.
3. Bankruptcy & disqualification: If you cannot meet the demand, creditors may petition for your bankruptcy, which can lead to temporary disqualification from future directorships.
4. Ongoing Liability: Being no longer connected to the borrower, for example by resigning as a director of the borrower company, does not automatically cancel your personal guarantee. You will remain liable until the lender releases you. Even if you pass away, your liability to the lender will not cease, it will extend to your estate until the lender releases your liability.

Can I limit my exposure under a personal guarantee?

Before signing a personal guarantee, consider these risk mitigation options:

1. Negotiate a Cap: Request a "limited guarantee" to ensure you are only liable for a fixed amount.
2. Limit the Scope: Ensure the guarantee applies only to a specific loan/facility, avoiding an "all-monies" clause that covers future loans/facilities.
3. Time-Bound Clauses: Negotiate an expiry date or a "sunset clause" for your personal guarantee so that you are no longer liable once the business meets certain financial milestones.
4. Personal Guarantee Insurance (PGI): Consider an insurance policy that covers a portion (often up to 80%) of the liability if the guarantee is called in.

Should you need expert legal advice regarding any of the above, please contact Joseph Seyed Hossein at joseph.hossein@fieldingsporter.co.uk or telephone 01204 540 900.

The contents of this article are for general information purposes only and shall not be deemed to be or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.