Personal Guarantees | Nature and Obligations
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 KANGS Insolvency Team 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 through any of the following who will be pleased to speak to you:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
