Personal Guarantee (PG), Company Director’s PG & PG Debt - Guide - Page 2

If you landed on this page & haven’t read the other page, you can visit our page by clicking on the link below or here. We have covered some basics & important aspects of Company Director’s Personal Guarantee in that guide like

Introduction to Personal Guarantee, Legal Requirements for a Guarantee, Enforceability of a Personal Guarantee, Ways to Get Out of a Personal Guarantee, and Examples of a Personal Guarantee. Click on the link below

Now that you are here after reading the other page, let’s understand other aspects of the Personal Guarantee like proper interpretation, loopholes, examples & more

Proper Interpretation of Personal Guarantees

Liability under the guarantee is determined by what is known as a “proper interpretation” of the contract of guarantee.
Legal obligations of guarantors are interpreted from the standpoint of a commercial perspective of a reasonable person, knowing what the parties to the guarantee knew as at the date of the contract. Here’s a guide to – reading contracts.
It has to be said that it is tough to avoid liability under a properly drafted guarantee. It narrows your options.
Whether you can get out of a personal guarantee often depends on what happened before the guarantee was agreed and what has happened since it was signed.
In hard cases, this means that you can’t tell whether you can get out of a guarantee without:
  • Reading the contract of guarantee and the terms of the guarantee; and
  • Knowing what happened before and after the contract of guarantee was agreed: i.e. all of the relevant facts of the case.
  • Whether or not a guarantee is enforceable is highly fact – a slight change of the facts can mean the difference between success and failure.
  • Limited Opportunities to get out
  • If you do get an opening to get out of a guarantee, that window of opportunity can be short before it closes on you.

Loopholes of Interpreting Personal Guarantees

Frequently, contracts contain obvious ambiguity.
When the facts of the case have happened (by the time courts come to consider them), they often contain latent ambiguities.

That is, the contract can be interpreted in more than one way.

Differences in interpretation – of “the construction of the contract” may mean the difference between success and failure of the guarantor avoiding liability.

It is important stuff if you are a guarantor who believes that it would be wrong for you to be liable.

Owing in part to the special nature of the contracts of guarantee, courts take a “strict” approach to interpretation. The means that “clear words” in the legal sense – must be used in the guarantee.
If there is ambiguity, it is likely to work against the creditor.

The reasons for doing so include:

Side-stepping attempts to exclude the application of general law requires clear and unambiguous language
The creditor drafts the contract. It presents it to the proposed guarantor to sign.
Therefore, the “contra proferentem rule” of interpretation applies so that ambiguities will be interpreted against the creditor.
The Court considers all the surrounding circumstances of the case, particularly as at the date the contract was signed.
The state of affairs and knowledge of the parties as of the date of the contact plays an important part in the outcome. This is because the Court uses the information to clarify the scope and extent of the guarantee. and therefore the obligations of the guarantee.

In “Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc” [2002], it was said in respect of the interpretation of contracts:

  • against the background of an admissible matrix of facts known to or at least reasonably available to the parties, the meaning sought is that of the language in question would convey to the reasonable man.
In that context, the language used is to be given its natural and ordinary meaning, unless a reasonable man would conclude that something has gone wrong in expressing the parties’ intentions.

What this means is that courts have the power to:

  • Consider evidence outside the contract to ascertain who was to receive the benefit of a guarantee
  • Interpret a contract to correct a mistake in its preparation
  • See past allegations, which are not supported by documentary evidence, but merely oral evidence
  • Ignore words, which attempt to exclude or limit the application of the general law, which would be to the advantage of the guarantor

Example Guarantee

In an appropriate case, a guarantee might be worded as follows:
The Guarantors hereby guarantee to [creditor] the due and punctual performance of all present and future obligations of [the debtor] to pay the monies payable to [creditor].
Guarantees in contracts are rarely this straightforward or simple.
Personal guarantee wording
The wording of a personal guarantee could be the same as the simple example above. The guarantors would be individuals, not companies.

What is a Personal Guarantee on a Business Loan?

Suppose a friend wants to take out a business loan with a bank to start a business.
The bank insists it receives a guarantee for the repayments of the loan before it gives the loan to your friend. You offer to be the guarantor.
If your friend then defaults on the repayments of the loan, the bank can call upon you to pay the outstanding sums on the loan.
This is one of the simplest forms of guarantee. Because you have guaranteed the loan in your own name (and say, not through a company), it is a personal guarantee. That means all of your personal assets are available to the bank to recover against if your friend defaults on the loan.

Directors’ Personal Guarantees

Directors of companies are often requested by banks to provide personal guarantees for sums lent to companies, which they control.
This situation is quite similar to the example above. When the director gives the guarantee, if the company cannot service the loan, the director is called upon for the sums owed on the loan. They are personally liable under the guarantee.

So:

A director of a company might personally guarantee to the bankers of the company that the company will pay all the loans of the company.
If the company defaults on payments or becomes insolvent, the bank can look to the director to repay the loans given to the company, on the strength of the personal guarantee.
A company director might give a performance guarantee to a service provider to the company that some state of affairs will exist throughout a contract between the service provider and the company. This is a “see to it” guarantee.

Recovery by Creditor from Guarantor

When a creditor recovers money from the guarantor because the debtor has defaulted on (say) a loan, the debtor remains liable to the guarantor for sums that the guarantor has paid the creditor.
The liability of the guarantor is said to be “secondary”. This is because liability arises in the guarantor at the request of the creditor. The guarantor assumes liability when the debtor fails to perform and the guarantor is called upon to honour the guarantee.

What is an “Unlimited Personal Guarantee”?

It is a guarantee that has no upper limit or cap on the amount that the creditor can recover under the guarantee.
Upper limits on recovery under a guarantee can be imposed by stating them in the contract. These sorts of clauses are known as limitation clauses or exclusion clauses.

“Is it a Guarantee?” Guarantees vs Indemnities

There are key differences between a guarantee and an indemnity.

Indemnity

A person who indemnifies another party to a contract promises to compensate them if a particular state of affairs does not happen, and the contracting party suffers loss as a result. They are directly contractually required to compensate the other party for their loss, they are “primarily liable”.
So an indemnity is an express contractual obligation to compensate for any loss suffered, independent of what the liability of the party in breach might otherwise be to a third party to the contract.

Guarantees and Secondary Liability

In contracts of guarantee, the guarantor assumes secondary liability. The guarantor answers for obligations for which the debtor, who remains primarily liable.
This means a guarantor is liable for (say) the debt regardless of the position of the debtor, and whether demand has been made upon the original debtor or not.
A guarantor only becomes liable when the debtor has failed to perform its primary obligations; the liability arises when the rights against the original debtor have been exhausted.
Just because a party is named as a debtor, does not mean that they cannot be found to be a guarantor as well. It depends upon the intention of the debtors, and whether they intended one to be a guarantor for the other.

Differences between Guarantees and Indemnities

RequirementGuaranteeIndemnity
Amount of liabilitySame as the debtor, usuallyIndependent of any guarantee
Liability arisesWhen the debtor is in breach of contractWhen indemnifier is in breach of contract
Given in writing?YesNot necessarily
Signed by the guarantorYesNot necessarily
ConsiderationYesYes
Compensate the loss of another personYesYes
Parties to ContractCreditor, principal debtor and guarantorIndemnified and indemnifier
Past consideration – good considerationNoNo
Variation to guarantee agreed between creditor and debtorGuarantee void under general lawIndemnity continues

Challenging Personal Guarantees

Standards of behaviour by creditors can vary from guarantee to guarantee. Unbelievably, there is a solid legal authority that says that no one guarantee will be interpreted in the same way for different contracting parties.
They are drafted in the main party with a view to being challenged by a debtor in the fullness of time.
However, there is only so much a draftsperson of a guarantee can do when drafting the guarantee document.
Important factors, which affect the enforceability of guarantees, happen in the real world, not in the contract of the guarantee itself.
Enforceability of a guarantee can depend as much on the behaviour of the creditor as the terms of the contract.
Still, there is no question that the contract should be reviewed before it is signed. When the advice does not say what it should say, there may be a claim against the advisor.

Mounting Business Debt and Personal Guarantee Support

There are lots of businesses that go into liquidation due to the failure of business modal or liquidity crunch to expand its services, if the business struggle to pay company directors its dues then company directors may struggle to pay their own debt repayments. In other words, if a company is struggling financially the Directors can be left with debts they are personally liable for. It might be possible to resolve these problems with a Debt Management Plan (DMP).
There are other formal debt solutions (Bankruptcy, IVA, CVA or DRO) available to sort out your personal and company debt. Which can affect your personal/business finances and assets severely and must be consulted with a suitable debt advisor before deciding to take up one.

Acme Credit Consultants Ltd is regulated by Financial Conduct Authority (FCA) to offer suitable debt advice ON YOUR DEBT PROBLEMS.

You can contact us on 0203 318 0990/ 0208 568 9687 for a free and no-obligation personal appointment to discuss your full case of director loans with Personal guarantees and if your business is unable to pay off business debt liability.

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