18 Jan 2024
Written by Begbies Traynor
If you find yourself in the position where the bank has called in a personal guarantee you have given to support business borrowing, you should always check that the personal guarantee is enforceable. There are certain situations where a guarantee may be deemed unenforceable, and that could get you off the hook as a guarantor. Here we explore what an unenforceable personal guarantee is, what factors might make it unenforceable and how you can challenge it.
A personal guarantee is a legal commitment that one or more directors will repay business borrowing if the company cannot. By giving them an extra way to recover the money, it mitigates the risks for the lender in the event of your company becoming insolvent and helps you secure vital funding for your business.
Personal guarantees often come with certain conditions. For example, they may only cover part of a loan or apply for a limited period. If more than one director signs a guarantee, they are usually joint and severally liable, which means the lender can enforce the guarantee against one or both directors. The lender will not necessarily target the directors equally. Instead, it will usually focus on the director with more financial resources and high-value assets.
As long as the guarantee is in writing and is signed by a guarantor with the intention and capacity to sign it, there won’t usually be any problems for the lender. Even if you resign from the company or close it down, the lender will still usually be able to enforce the guarantee.
If the company defaults on a finance agreement or enters into liquidation proceedings, the lender will usually write to the guarantor to request the payment. If you do not make the payment, the lender can seek a court judgment to enforce the guarantee, and at that point, your personal assets could be at risk.
An unenforceable personal guarantee is one the lender cannot call in when the company is unable to pay a debt. Several factors can make a personal guarantee unenforceable:
Most lenders now require all prospective guarantors to seek independent legal advice before signing. If you receive legal advice, you’re less likely to be able to successfully challenge the guarantee.
If you want to challenge a personal guarantee that has been called in, you need to act quickly. That will give you time to consider the potential routes for a challenge before enforcement begins.
Given the high cost of litigation, you must have genuine grounds to base your challenge on. If you do, lenders will usually be reluctant to go to court as it could set a dangerous precedent that affects thousands of guarantees they hold. As a result, they may be willing to reach a settlement which will reduce your liability.
If a personal guarantee you have provided has been called in and you think it’s enforceable based on the points in this article, there are some practical steps you can take:
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