Threats to Directors and and other Guarantors: The Personal Guarantee (‘PG’) in 2024.
In today’s uncertain financial climate, Banks, Landlords and other lenders are increasingly looking to rely upon and enforce PGs. They can have significant impacts on the lives of SME owners, Directors, and their spouses once called upon, often when the primary obligor is a limited company entity that goes into insolvent liquidation.
However, if you are facing a demand under a PG, all is not lost—there are often ways to defend against or mitigate these PG claims. Conversely, when well drafted and with the right advice, PG’s can also be powerful and effective tools for debt collection.
If you have given a PG and are concerned that it has been called upon, or are facing the possibility, read on. PGs are not always valid and/or enforceable, and there may be ways to mitigate or even avoid liability.
1. What is a Personal Guarantee?
A PG is a contract of suretyship, where the Guarantor promises to fulfil certain obligations of another party, known as the ‘Principal.’ Typically, the Principal is a company associated with the Guarantor and the guaranteed obligation is often a bank loan or other financial commitment of that company or perhaps to a finance company or a Landlord. The PG promises the Principal that the Guarantor will, on demand, repay the loan and meet the PG obligations by a specified date.
It gets worse for the Guarantor:
A well-drafted PG usually includes a clause obligating the Guarantor to cover the legal and other costs of collecting the guaranteed sum, plus interest. Consequently, the Guarantor’s liability could significantly exceed the original amount guaranteed.
2. Do I have to pay my PG liability?
Receiving a demand under a PG can be alarming, but with the right advice, you may be able to reduce or avoid the liability altogether. Here are several factors to consider when evaluating your liability to pay under a PG:
a. Defences under equity. Certain equitable principles can render a PG invalid, leaving the Principal with no claim against the Guarantor. For instance:
- Alteration of Terms: If the terms of the PG are altered without the Guarantor’s consent, this may invalidate the PG.
- Contra Proferentem Rule: In cases of ambiguity, this rule can be applied to interpret the terms of the PG in favour of the Guarantor and against the Principal.
b. The Consumer Rights Act 2015
Previously governed by the Unfair Terms in Consumer Contracts Regulations 1999, consumer protection in PGs now falls under the Consumer Rights Act 2015. This legislation can be used to challenge the enforceability of a PG, especially if it involves a spouse who is not directly involved in the business.
c. Writing and execution requirements
Under the Statute of Frauds 1677, a PG must be in writing and properly executed. Although the formalities are minimal, failure to meet these requirements ‘may’ render a PG unenforceable. Note that on occasion a PG has been held to be enforceable without meeting the strict provisions of the Statute of Frauds. Every case turns on its own facts.
d. Valid demand
Any demand made under a PG must satisfy the specific terms of the guarantee and be valid under the contract of guarantee.
e. Release of the Personal Guarantee
A PG may be released if, for example, the facility for which it was provided has been discharged. Whether a PG has been released will depend on the specific facts of the case.
f. Secondary ‘See To’ Guarantees
These types of guarantees, which cover losses rather than specific sums, require the Principal to mitigate its losses before making a demand on the Guarantor.
g. Common sense interpretation
According to Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191, if a literal interpretation of a contract leads to an outcome that defies business common sense, the contract must yield to a more sensible interpretation.
h. Set-off rights
If you as Guarantor are owed money by the Principal, the Guarantor may be able to set off these amounts against the liability under the PG.
i. Consideration
A PG must usually be supported by consideration. If a PG is provided for an existing loan without new consideration from the Principal, it may be unenforceable.
j. Misrepresentation
If a Guarantor was induced to enter into a PG based on a misrepresentation by the Principal, the PG can be voided. This principle was established in London General Omnibus Co v Holloway [1912] 2 KB 720. The facts of each case need to be looked at carefully.
k. Lack of Free Will
Courts recognise that some individuals may enter into PGs under undue pressure or coercion, particularly in the context of family relationships. The threshold for proving undue influence is relatively low in such cases.
l. Even if a Personal Guarantee is deemed to be valid and enforceable
Then that is by no means the end of the story for the Guarantor or the Principal – far from it in fact. The Guarantor is then left with the option of arguing ability to pay and, from the Principal’s perspective, ability to make a financial recovery from the Guarantor, bearing in mind the wider financial obligations of the Guarantor.
We are well used to negotiating financial settlements in such circumstances.
Conclusion
The area of PGs is complex and obtaining legal advice is crucial. Numerous extraneous negotiation tactics may apply, such as questioning whether the Principal is willing (for example) to risk voiding other PGs through litigation. Are there co-Guarantors? Has security (e.g. a Legal Charge) been given (if so, by who?) in relation to the debt?
We can help with defending and reducing Personal Guarantee Claims
All these matters are likely to be very relevant. If you have concerns about a PG, do not hesitate to seek professional advice. Contact us or call us on 0121 200 7040.
For personalised advice, feel free to contact Iain MacDonald (or any other member of the Team), a specialist in insolvency law with experience in both regional and national practices. He is currently based in London and is available for an initial free consultation to discuss your options.
About the author of this Blog
Iain MacDonald is a qualified solicitor specialising in insolvency law. This article is intended for general information purposes only and does not constitute legal or professional advice. Legal advice should be sought for your specific circumstances, and please note that the law may have changed since the publication of this article.
