08/11/23

Personal Guarantees | Nature and Obligations

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A Personal Guarantee is given by an individual, the Guarantor, for the benefit of a third party, which
may be an individual or corporate body, as security to a creditor, such as a bank or supplier of
materials, to ensure that in the event of the third party defaulting in payment, the Guarantor
becomes responsible for discharging the liability which has arisen.

The granting of Guarantees, whether by an individual or a corporate body, is an essential part of
every-day commercial activity. For example, directors of a company entering into a lease of premises
will frequently be required to show their commitment to the company and faith in its ability to pay
its debts by granting Personal Guarantees, operative should the company fail to discharge the rent
and accompanying liabilities.

Inevitably, both individuals and companies regularly default in fulfilling their contractual obligations
leading to the holder of the Guarantee(s) seeking to enforce compliance by the Guarantor(s) of the
promises made.

Potentially, an individual providing a Personal Guarantee is exposing all personal assets for
seizure up to the amount of the guaranteed liability.

STUART SOUTHALL of KANGS comments upon Personal Guarantees generally and when they
become effective:

Nature of Personal Guarantees

There are different formats in which a Personal Guarantee may be provided, two examples being as
follows:

  • All Monies Guarantee

Mainstream lenders, such as banks, generally require a Guarantee in this form where the lender
provides an ‘unsecured’ sum of money i.e. that has not been secured against property of any nature,
whether by way of loan or overdraft.

Where such a Guarantee has been given, until such time as the lender releases the Guarantor from
all obligations, any other money that may be advanced, irrespective of when advanced remains
outstanding.

  • A Specific Guarantee

A Guarantee of this nature is designed to cover a specific liability, the amount of which may be a
capped.

Crystallisation of Personal Guarantees

  • In the event that the Personal Guarantee secures transactions of a company, liability arises
    upon that company ceasing to trade.
  • A company should legally cease to trade when it cannot meet its debts, as and when they fall
    due, and which may be before any form of insolvency process has commenced.
  • ‘Crystallisation’ of the liability under the Personal Guarantee i.e. the moment when the
    beneficiary of the Personal Guarantee is entitled to repayment, occurs the moment the
    company ceases to trade.
  • At the moment of crystallisation, the only action required from the beneficiary of the
    Personal Guarantee to secure the repayment of the outstanding liability is to make a formal
    demand for repayment.
  • The issue of a formal demand by way of a Statutory Demand represents the most efficient
    manner given that a Statutory Demand is difficult to challenge in such circumstances.

How Can We Assist?

Avoiding liability under a Personal Guarantee provided totally voluntarily is extremely
difficult, and to a large extent, any such defence will arise from the discrete
circumstances of the transaction.

However, potential grounds may include fraud, negligence, and a failure of relevant
disclosure which prejudices the Guarantor from the outset.

Individuals, all too often sign Personal Guarantees totally unaware of the implications, obligations
and potential risk to their personal assets. It is imperative that prior to undertaking such liability,
expert legal advice is sought.

The Insolvency Team at KANGS is highly experienced assisting clients
facing liability under Personal Guarantees and will be able to provide you with the appropriate
guidance, advice and representation.

Please do not hesitate to contact the Team at Kangs Solicitors through any of the following who
will be pleased to speak to you:

Tim Thompson

Tim Thompson
Partner

Email Phone
Nazaqat Maqsoom

Naz Maqsoom
Associate

Email Phone
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