Personal Guarantee (PG), Company Director’s PG & PG Debt - Guide - Page 1
We have divided our Basics & FAQs on Personal Guarantees into two different pages so that you won’t be overwhelmed with details. Please read the next page for more information & other FAQs that may help you understand Personal Guarantees & Director’s Personal Guarantee in more detail format.
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Guarantees and Personal Guarantees are important and serious commercial documents.
When you sign one it is difficult to get out of it, when they are properly done.
Then some things can happen outside the contract that allows can make the guarantees and personal guarantees unenforceable.
What is a Personal Guarantee?
A personal guarantee is a guarantee given by a person rather than a company.
The liability to honour the guarantee is personal to you. There is no protection from a company. This means that all of your assets are on the line to payment if the lender is not able to get a full refund from the business.
Personal guarantees are attractive to creditors when the guarantor has assets to cover the exposure of the creditor.
Legal Requirements for a Personal Guarantee
Many documents are called guarantees when they are not.
The factors that courts take into account are:
Proper Interpretation
“Contracts of Guarantee are interpreted as a whole”. It is the particular words used in the relevant clauses that count. Not what it is called.
Title of document:
the title of the document is not decisive
Substance over form:
Just because the word “guarantee” is used in the contract somewhere, does not make it a guarantee.
Guarantees have several formal requirements to be a guarantee to put it beyond doubt that it is a guarantee.
Form of guarantees:
It must be evidenced in writing. The writing is maybe a formal contract or agreement, note, memorandum or promissory note
Signed:
The guarantor should sign it, or have their authorised agent sign it. The name may be written or printed, so long as it is intended to operate as a signature
Secondary Liability:
Establish that the guarantor has a secondary liability to perform the guaranteed obligation. The principal debtor has the primary liability to “perform the contract”.
Consideration:
The document should satisfy the requirements of any other contract.
That means, offer and acceptance, consideration, an intention to be legally bound and capacity to make the contract
What Makes Personal Guarantees So Special?
The parties to a contract make promises that they will do the things set out in contracts. The party to the contract is responsible for the performance of a promise.
Guarantees are different. Guarantees are a promise by a person not responsible for the performance of the contract.
Guarantors receive no benefit from the contract.
They expose themselves to the liability of the contract for no return.
Guarantors promise that they will make good to a creditor failure by the primary contracting party to perform the contractual obligations.
Therefore, guarantees create a secondary obligation to perform the contract on the guarantor, where the primary obligor (often a debtor) fails to deliver on their contractual obligations.
For these reasons, law imports special considerations for guarantees to be valid: the guarantor is not primarily responsible for the performance of the contract. It is outside their control. Someone else is primarily responsible.
We come to the main differences between indemnities and guarantees in a moment.
How Long is a Personal Guarantee Enforceable?
A guarantor’s liability is “coextensive” with the debtor.
Whatever the debtor is liable for to the creditor is the liability of the guarantor. If the debtor’s liability is released, so is the liability of the guarantor.
Guarantors have all the defences to payment and/or performance available to them as the debtor.
This means two things:
Where the debtor remains liable to the creditor, so does the guarantor.
If the debtor can show that his or her liability is extinguished or reduced, the guarantor gets the benefit of that reduction.
There may be terms in the contract of guarantee, which caps the liability of the guarantor or even limits the time in which the credit can call upon in the guarantor to make good the default.
When Do Personal Guarantees Become Unenforceable?
In the worst case, they only become unenforceable after the relevant “limitation period” expires.
A limitation period is a maximum period allowed by the law to commence legal proceedings for breach of the contract of guarantee. Then the contract may contain time bars, which restrict the time within which the creditor may claim. It depends on what is said in the contract.
The general law rules are:
For normal contracts, 6 years from the date that the breach of contract took place
For deeds, 12 years from the date of the breach.
It is not likely that a creditor will allow this to happen.
In addition, things might have happened before or after the guarantee was signed which make it unenforceable.
That is next.
Defences: How to Get Out of a Personal Guarantee
Some guarantees will have loopholes, others will not. However, it is not just the terms of the guarantee that decide these things. The creditor may behave themselves in a way that prevents them from relying on the guarantee.
Some of the more common ways guarantors get out of a personal guarantee include:
The guarantee has been undermined by fraud or undue influence; because the guarantor was substantially misled before, it was signed
The creditor repudiated the contract of guarantee, and the guarantor accepts the repudiation
The creditor has failed to tell the guarantor something that affects the relationship between the debtor and creditor
A variation is made between creditor and debtor in a way, which the guarantor would not have expected. Possibilities include:
Extension on the time to pay
Increase in the sum of the debt of the debtor
A “condition precedent” to the guarantee was agreed and never satisfied.
Examples of Guarantees:
The guarantor may have agreed to be a co-guarantor. The other intended guarantor never signed the guarantee as guarantor.
The guarantee was intended to be signed as one document as part of a larger transaction, and those other contracts were never signed.
In each case, the contract would not come into existence in the first instance because the condition had not been satisfied.
The guarantee was to be secured over specific property, and That asset does not exist, and no other forms of security can be identified as a substitute.
Each of the parties has operated under a common mistake, the guarantor has acted under economic duress.
The practical effect of the pressure is that there is a compulsion on or a lack of practical choice for the guarantor.
The pressure must be illegitimate, as opposed to “the rough and tumble of the pressures of normal commercial bargaining. It is a high standard to satisfy.
The Unfair Contract Terms Act 1977 applies to relieve the guarantor of onerous terms of the guarantee.
As you can imagine, creditors take guarantees seriously. They will prepare the guarantee document to make sure their interests are protected. Usually.
Reduction of Amounts Owed
The liability of guarantors can be reduced to the extent that:
The debtor discharges the financial liability to the creditor
A damages claim for misrepresentation caused the guarantor to enter into the agreement, was albeit not fraudulent, but negligent
Breach of an “implied term” of the contract to take reasonable care to ensure that the price at which property is sold is the best price that can be reasonably obtained for the security given under the guarantee.
Please click on the link here to go to our next page to read more about Personal Guarantees further.
We have covered –
- Proper Interpretation of Guarantees
- Interpreting Guarantees: Loopholes
- Example Guarantee
- Personal Guarantee on a Business Loan
- Directors’ Personal Guarantees
- Recovery by Creditor from Guarantor
- Unlimited Personal Guarantee
- Differences between Guarantees and Indemnities
- Challenging Personal Guarantees
- Mounting Business Debt and Personal Guarantee Support
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.
