A personal guarantee is a legally enforceable promise by a person to repay the debts of another person. A person could be a company, LLP or an individual. Usually banks and other lenders lending money to a company will insist that the debt is personally guaranteed.
The risk to the person giving the personal guarantee, (who is called ‘the guarantor’) is that, if the borrower fails to repay the debt, the lender will be entitled to seek repayment from the guarantor. However, most guarantees often include terms which the guarantor may not expect, which is a reason why banks insist that a solicitor advises the guarantor on the personal guarantee document.
Typically, the lender will not be required to pursue the borrower before enforcing the guarantee. If the borrower defaults in its payments, and the lender considers that pursuing the borrower may not lead to recovery, the lender may simply decide to pursue the guarantor. Also, most guarantees are “all monies” guarantees. This means that they guarantee the repayment of all monies owed by the borrower to the lender. For instance, the guarantee may be given in relation to one loan, but if the borrower subsequently takes out another loan with the same lender, that amount will be guaranteed under the original guarantee.
Due to the onerous nature of guarantees, the courts have taken the position that, in most circumstances, the guarantor must have received independent legal advice, so that they are clear as to what they are agreeing to and are not signing the guarantee under duress.
Lenders will require that a guarantor is given legal advice on the terms of the guarantee by a solicitor who does not also act for the borrower. Although this may appear to be a formality, it has important consequences if the advice is given incorrectly. For the guarantor, they may be signing a document which contains terms more onerous than they were anticipating. For the lender, incorrect advice may (but not always) mean that the guarantee is ineffective. It is important for all parties therefore that this advice is given properly, and the solicitor giving it is suitably familiar with guarantees and has properly reviewed the document in question.
At Ramsdens Solicitors, our Company & Commercial team are experienced in providing advice to guarantors. For more information or to make an enquiry, please contact our team by emailing info@ramsdens.co.uk or calling 01484 821 500. Alternatively you can fill out an online enquiry form and a member of our team will be in touch.