Entering into a personal guarantee is one of the most significant financial risks a person can take. Before agreeing to give a personal guarantee, you need to understand what it is, what the risks are for you and when it can be enforced.
In this article, we’re going to outline important points you need to know about personal guarantees and their risks so you can make an informed decision about whether they’re the right option for you.
What is a personal guarantee and what are the risks?
A personal guarantee is a legally binding agreement between the guarantor and the lender who loaned the money to the borrower. Under such an agreement, the guarantor agrees to personally repay a debt incurred by the borrower should the borrower fail to meet their financial obligations to that debt. For example, a director could be a personal guarantor for a bank loan made to their company or parents could personally guarantee a car loan for their child.
In the case of the director who personally guarantees a loan for their company, if the company then defaults on repayments or even goes into liquidation and cannot repay the debt due, the lender can call in the personal guarantee the director has signed and pursue the director personally for repayment of the sums outstanding. Even where a director resigns from being a director, a lender may still be able to call in a personal guarantee if such guarantee hasn’t been terminated.
In some cases, guarantees are capped, limiting the amount a creditor can recover. However, even a capped guarantee can expose guarantors to substantial personal liability.
Lenders may also insist on the guarantor providing security for their liability under the personal guarantee – for example a legal charge on the guarantor’s property.
What happens if I use my property as a security?
Once a lender calls in a personal guarantee, as guarantor, your personal assets are at risk. If you’ve used your property as security, the lender is entitled to enforce that charge, which can lead to possession, eviction of occupiers and the sale of this property.
Enforcement action can also be taken against the guarantor’s other personal assets, and in more serious cases, bankruptcy proceedings may be commenced.
When can personal guarantees be enforced?
The enforceability of a guarantee depends on the terms of the loan agreement and the guarantee document itself. These set out the specific events of default that will trigger liability. Common examples include:
- Loan repayment default — failure to pay an instalment or the full loan on the due date.
- Trigger events — the occurrence or non‑occurrence of a specified event, such as the borrower failing to meet other obligations that it has under the loan agreement.
- Insolvency proceedings — the borrower entering administration, liquidation, or similar processes.
Most guarantees become automatically enforceable once a default occurs.
Can a guarantor challenge a personal guarantee?
Challenging liability is difficult, but in some circumstances, not impossible. A guarantor should closely analyse:
- The wording of the guarantee — to identify when liability crystallises and what sums are covered.
- The lender’s conduct — in rare cases, enforcement may be challenged if the lender contributed to the default.
- Duress — if the guarantee was signed under genuine duress (not merely commercial pressure), this may provide grounds to resist enforcement. To minimise the risk of this defence being used against them, lenders will usually insist on a guarantor taking independent legal advice before signing a personal guarantee.
The above arguments, along with other arguments that can be run to challenge a personal guarantee, are highly fact‑specific, and courts apply them narrowly.
Where personal guarantees cannot be challenged, it is important to proactively liaise with the lender, without delay, as ‘deals’ or settlements can often be reached to avoid enforcement action being taken against the guarantor and their assets.
How Gorvins can help:
If a creditor is seeking to enforce a personal guarantee, immediate and proactive action is essential. Delays can lead to aggressive enforcement steps, including insolvency proceedings.
Our litigation team has extensive experience advising directors facing personal guarantee claims and can help you assess your position, negotiate with creditors, and protect your personal assets.
Our litigation team as vast experience in acting on behalf of directors who have been pursued by a creditor under a personal guarantee. To speak to a member of the team, call us on 0161 930 5151, email us at enquiries@gorvins.com or complete our online enquiry form.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.