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Personal Guarantees and Independent Legal Advice

If your company is borrowing money from a third party lender, whether under a loan agreement, via an overdraft facility or otherwise, a personal guarantee is often required by the lender in order to introduce:

  1. a personal element of risk for the individuals behind the borrower company; 
  2. a form of additional security should the contractual obligations binding the borrower company be breached.

However, before entering into a legally binding guarantee most institutional lenders will require a personal guarantor to obtain independent legal advice on the terms of the guarantee by an independent solicitor who is not acting for the borrower company or the lender in the related transaction. 

What is a personal guarantee and what are the risks?

A personal guarantee is a legally binding obligation on an individual (usually a director or shareholder of a borrower company) to repay a company’s debt or borrowing. 

In doing so, the individual providing the personal guarantee (the ‘Guarantor’) will be required to personally repay the debt or comply with the obligations he or she has undertaken to guarantee on behalf of the borrower company to the lender.
 
If a Guarantor is unable to meet such obligations then they risk being the subject of enforcement action for any debt arising under the guarantee and potentially putting their personal assets at risk. 

Why do you need independent legal advice for a personal guarantee?

This is a lender’s requirement in order to remove any possibility of a Guarantor’s argument that they either did not understand the nature of the guarantee document they signed, or that they were in some way pressurised or unduly influenced before entering into the guarantee, if the guarantee is enforced against them.

To protect a lender’s position, some lenders will require a Guarantor’s signature witnessed by a solicitor, who will also be required to confirm in writing to the lender that independent advice has been given at an obligatory face to face meeting, with confirmation that the nature and effects of signing the guarantee have been properly explained to the Guarantor.

Can a personal guarantee be released (ie. cancelled) or transferred?

A personal guarantee may only be formally released and cancelled upon the written consent of the lender, usually in the form of a Deed of Release document, once all debt and borrowings have been repaid to the lender in full.

Some lenders do allow Guarantors to have the ability to serve notice and bring their guarantee to an end, however the service of such notice will require any liability of the borrower company to be repaid in full. Therefore a Guarantor needs to determine whether the borrower company can make this repayment before exercising such notice.

It is highly unlikely that the obligations under a personal guarantee will be freely transferable by the Guarantor. Therefore if a Guarantor wishes to be released from the guarantee, they will have to seek the consent of the lender (usually in writing) and may have to find a replacement Guarantor satisfactory to the lender before being released and the guarantee being transferred to a new Guarantor party.

Legal assistance

If you require independent legal advice on a personal guarantee, and Glanvilles is not acting for your borrowing company or lender as part of the main transaction generally, then please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on [email protected].

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.