Negotiating Out Personal Guarantees – How Much Value Are They? – And Responding to Demands for Payment
With the majority of lenders hesitant in these uncertain times to provide funding without adequate repayment safeguards in place, we have seen a significant increase in clients seeking advice as to their exposure to claims under Personal Guarantees and how best they might respond to such claims.
In this article we look at what Personal Guarantees are, what can happen if the terms of the Personal Guarantee are not met and what options a company Director(s) who has given a Personal Guarantee has available to him/her.
It is the last part of this article, looking at practical considerations, that may be of most interest to readers.
What is a Personal Guarantee? How do They Work?
Personal Guarantees are (in theory) simple, and it is no surprise why lenders are so reliant upon them. In practice, the Guarantor (often a company Director) legally agrees to be personally liable for the company’s debts, if its obligations are not met. If the company is then unable to pay and thus fulfil its obligations to the lender, the lender can then sidestep any insolvency process the company may enter into, and look to recover the debt from the Guarantor personally, relying on the Personal Guarantee.
What are the Risks Associated with Personal Guarantees?
The risks associated with personally guaranteeing large company loans can manifest themselves with serious consequences, with potential outcomes for the Guarantor that include significant equity decreases in the family home or, in the most severe case, bankruptcy.
Can Personal Guarantee Claims be Challenged? Yes. In Particular if the Guarantee Does not Fulfil the Necessary Legal Requirement
Receiving a personal guarantee claim can be highly stressful. It is not all doom and gloom, however, as there are indeed ways and means of challenging personally guaranteed obligations.
The law imposes several formal requirements that must be met if a Personal Guarantee is to be enforced against the Guarantor. They include:
- The form of the personal guarantee: The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee (or some memorandum or note of the guarantee) must be in writing and signed by the Guarantor or a person authorised by the Guarantor. The writing may be a formal contract or agreement, or it can indeed be given by simple means such as an email or memorandum.
- It must be signed: The Guarantor should sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature. The High Court in Golden Ocean Group Ltd v Salgaocar Mining Industries  EWHC 56 decided that ‘signature’ should be given a wide interpretation.
If the name of a Guarantor appears in an email with the intention that it is a signature and there is evidence of an intention to contract, then the name will constitute a signature for this purpose. Therefore, as long as it is intended to operate as a signature, the Guarantor will most likely be bound by it.
- Secondary Liability: It must be established that the Guarantor has secondary liability to perform the guaranteed obligation and the principal debtor has the primary liability to perform the contract. This will be evidenced within the terms of the Personal Guarantee document.
- Consideration: The document should satisfy the requirements of any other contract in that there should be adequate consideration. This is however subject to general contractual principles so for example, past consideration will not usually be valid consideration.
In the absence of a clearly drafted and executed document that fails to satisfy the basic formalities of a contract and the legal requirements of a Personal Guarantee, it may not be enforceable.
Additional Ways to Challenge a Personal Guarantee Claim
There are additional ways of challenging Personal Guarantee claims, especially those that fall within one of the below categories:
- Misrepresentation and/or Undue influence – The Guarantor may have been substantially misled before they entered into the Personal Guarantee. This could result from any undue influence or misrepresentation by a third party.
- Repudiation – The creditor may have (unwittingly) repudiated the terms of the Personal Guarantee and that repudiation may have been accepted by the Guarantor.
- Variation of terms – There may have been oral or written variations to the Personal Guarantee which may affect the terms of enforcement, such as extensions of time given and the waiver of one or more terms of the original document, which may raise the possibility of a successful challenge by the Guarantor.
- Legal advice – There may be an obligation on the creditor to inform any prospective Guarantor to take independent legal advice before entering into the Personal Guarantee. Failure to so advise, may give the Guarantor legitimate grounds to oppose the Personal Guarantee Claim.
Talk to our Specialists if you are Facing a Personal Guarantee Claim: Practical Considerations
In our experience, all is not lost, and the outcome is not inevitable, when a Personal Guarantee Claim is received. It is not always an open and shut case for creditors to enforce Personal Guarantees Claims as each case is highly fact specific.
We frequently come across dubious documents that purport to be Personal Guarantees and which are successfully challenged.
Good Old Fashioned Negotiation
The following matters are, in practice, of enormous benefit and are very powerful negotiating tools in negotiating out liabilities claimed under Personal Guarantees and, possibly, wider personal financial obligations.
Inability to Pay
No creditor wants to throw good money after bad, incurring legal expense and wasting time pursuing a Guarantor who:
- May have indicated a willingness and grounds to oppose the Personal Guarantee Claim.
- May be able to demonstrate inability to pay the Personal Guarantee Claim (looked at in isolation) or inability to pay, looked at in the context of all the Guarantors debts, owed to all of his/her creditors.
On the ‘inability to pay/other creditor’ position, NDP are well used to deploying the numerous facets of such arguments to maximum effect, resulting in affordable settlement of Personal Guarantee liabilities, often with time to pay settlements over time.
Threat of Personal Bankruptcy or Individual Voluntary Arrangement (‘IVA’) for the Guarantor
Bankruptcy or an IVA (or even the threat of it) may actually be a sensible option for the debtor. Explained properly in a constructive way to a creditor, our experience is that such explanations do result in settlements for Guarantors.
The old adage of preferring to have 20% of something rather than 100% of nothing, holds true. The creditor must however be persuaded that the deal is an agreed one/the best that can be achieved by that creditor.
In the words of the late, great comedian, Frank Carson ‘it’s the way you tell them!’. At NDP, we are well used ‘to telling them’.
Several factors come into play when deciding whether to challenge a Personal Guarantee claim. If you would like to discuss your position, please contact us or call a member of our team on 0121 200 7040 for a free no obligation chat on what approach is best in your circumstances.