In the context of bank funding or loan facilities to a company it is not uncommon for a bank to ask the Directors of a company to provide a personal guarantee to secure the lending.
The level of security granted by the borrower will depend on the nature of the loan and may often include a legal charge over real property or assets.
When considering giving a personal guarantee the following points will need to be considered:
1.How much are you guaranteeing and is there a cap on liability?
The guarantor must be comfortable that they are in a position to meet the full liability, if required, for the duration of the guarantee being in force. It is also important to establish whether any further borrowing by the company can be guaranteed under the same guarantee or whether it is capped at the original borrowing.
2. Are the guarantors ‘jointly’ or ‘jointly and severally’ liable?
More often than not guarantors will be jointly and severally liable which means the lender can pursue any or all of the guarantors for the full amount. In a situation where there are two guarantors, joint and several liability will mean that they are not just liable for 50% of the amount due but for the full amount. Choose your co-guarantor carefully!
3.Is it a guarantee or an indemnity?
A guarantee creates a liability on the guarantor to fulfill the obligations of the borrower. If the original agreement between the lender and borrower was to fall away then the guarantor’s liability will also be withdrawn. It is however usual for the lender to request an indemnity from the guarantor which allows the guarantee to remain in place even if the underlying agreement between the lender and borrower fails.
4.Are there any additional costs ?
Often the guarantor is likely to be liable for any costs incurred by the lender in pursuing the debt together with any interest on the outstanding debt.
5.Are your assets at risk?
If for whatever reason a guarantor is unable to discharge the borrower’s debt then court proceedings may be issued against the guarantor for breach of contract. This in turn may initiate bankruptcy proceedings putting the guarantor’s personal assets at risk.
Independent legal advice in relation to a personal guarantee is always recommended.When negotiating loan facilities with a lender it is important to understand the terms on which the loan is being provided and to enter into any facility with caution. Clients are often surprised with the changes that can be achieved with the correct advice.