Personal Guarantee (PG), Company Director’s PG & PG Debt - Guide -
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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What is a Personal Guarantee?
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Legal Requirements for a Personal Guarantee
The factors that courts take into account are:
“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.
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What Makes Personal Guarantees So Special?
- 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?
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.
When Do Personal Guarantees Become Unenforceable?
In the worst case, they only become unenforceable after the relevant “limitation period” expires.
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.
Defences: How to Get Out of a Personal 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 Unfair Contract Terms Act 1977 applies to relieve the guarantor of onerous terms of the guarantee.
Reduction of Amounts Owed
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.