Threats to Directors and Guarantors: Personal Guarantee Claims.
In the current choppy financial climate banks are increasingly seeking and enforcing Personal Guarantees, which can crystalise on a director in an insolvent situation. As a result, they often critically affect the lives of owners and directors of SMEs, as well as their spouses and families, so it is vital that directors understand how best a personal guarantee claim can be managed.
If you are on the receiving end all is not lost when personal guarantees are called upon, because they can often be effectively defended and/or reduced. Alternatively with the correct advice they can also be fearsome and effective collection devices, as Iain MacDonald, one of our consultant solicitors, points out in this BLOG.
If you have given a Personal Guarantee and you are concerned that it may be called on, or if it has been called on, then read on and contact us for more advice on how you might defend or reduce the claim. Often personal guarantees are not valid at all.
What is a personal guarantee?
A personal guarantee is a contract of what is termed suretyship. The ‘Guarantor’ guarantees certain obligations of another party called the ‘Principal’. In a typical situation the Principal is usually a company belonging to the Guarantor and the obligation guaranteed is a bank loan to this company i.e. the Principal. The guarantee is therefore made to a third party (usually a bank) that the Principal will repay a loan on or before a certain date.
A well-drafted personal guarantee will include an obligation on the Guarantor to pay for the costs of collecting the guaranteed sum plus interest so the amount of the Guarantor’s liability may be far higher than the amount, which was originally guaranteed.
Do I have to pay my Personal Guarantee liability? Can I reduce it or avoid it?
It is always nerve racking when you receive a demand to pay under a personal guarantee. All is not lost however and with proper advice they can often be reduced considerably or avoided altogether.
There are a number of things to consider when deciding the level of your liability under a personal guarantee. The main one being whether you have a defence or not. It is crucial to take advice on this because the range of defences are both numerous and complex beyond belief. The following is by no means an exclusive list and is an overly simplified run through in order to give you a flavour of what you can expect:
It is vital to understand that certain principles govern personal guarantees and that breaching them can invalidate the guarantor, leaving the Principal with no claim against the Guarantor. For example:
– E.g. 1: altering the terms of the guarantee without the consent of the Guarantor can invalidate a PG; and
– E.g. 2: in cases of ambiguity the contra proferentum rule can be employed in order to interpret ambiguous personal guarantee often in favour of the Guarantor and against the Principal.
2. The Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”)
The UTCCR is legislation, which can be deployed to avoid a personal gurantee if the circumstances are correct. Typically it can be used to release the wife of a company director when she is not involved in the business.
3. Personal Guarantees must be in writing
A personal guarantee has to be in writing and executed as set out in the Statute of Frauds 1677. The formalities are in fact however scarce.
Any demand made has to satisfy the contractual terms of the personal guarantee and be otherwise valid.
5. Has the personal guarantee already been Released?
A personal guarantee can be released if for example the facility for which it was created has been released and the circumstances now surrounding the purported personal guarantee do not support its continuing existence. This is largely a matter decided on the facts of the case.
6. Secondary “See To” Personal Guarantees
Such personal guarantees are not calls for a specific sum but for a loss and these are therefore subject to the legal obligation that the Principal is under an obligation to mitigate its loss prior to making demand.
7. Common Sense
According to Lord Diplock (see: Antaios Compania Naviera SA v Salen Rederierna AB  A.C. 191) “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.
8. Set Off
You may be owed monies by the Principal and be able to set these off against its claim against you. These claims can be complex such as those relating to the recent scandal of hedging interest rate swaps.
9. A personal guarantee can only be given for ‘consideration’
Personal Guarantees can, for example, be avoided using this tool if a personal guarantee is given on an existing loan when the bank is unable to call it in lawfully.
The guarantor is automatically released under this principle if he was caused to enter into the personal guarantee in reliance upon a misrepresentation known to the Principal (see: London General Omnibus Co v Holloway  2 KB 720). Such misrepresentations may be as to the nature of what is being guaranteed or the underlying debt between the company and the bank.
11. Free Will
We are not exploring the realm of philosophy here, but the courts have recognised that certain people enter into personal guarantees through coercion and the test for this is surprisingly light. No thumbscrews are required just a marriage certificate. But that as they say is another story.
We can help with defending and reducing Personal Guarantee Claims
This area of law is very complex. Obtaining legal advice is key, and the sooner you obtain it, the more can do to help. In addition there are myriad hidden negotiation tactics such as – does the bank wish to litigate and risk voiding thousands of other existing personal guarantees? Should you have any cause for concern regarding a personal guarantee claim against you or your company, please contact us or call us on 0121 200 7040 and ask for Neil Davies or Iain MacDonald. They are always happy to have an initial free chat in order to explore your options.
About the author of this Blog
Iain MacDonald is a qualified solicitor who specialises in insolvency law and has worked in both regional and top ten national practices. He is currently based in London, and is a consultant solicitor to NDP
(This blog is purely issued for general information purposes only and does not constitute legal or professional advice. It should not be used under any circumstances as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the publication date of this article.)