What is a Personal Guarantee?

A personal guarantee is essentially a document that makes an individual liable for the debts incurred by a third party. In the circumstances of a business loan agreement between a bank and a company, a personal guarantee can place the liability to repay the loan on individuals (usually the directors). Credit and service providers sometimes use this document to supplement the principal agreement.

Personal Guarantee Gone Wrong

A personal guarantee is a very powerful tool to secure payment of debts, but it also has stringent requirements and if the personal guarantee is not drafted with care, a creditor risks rendering the personal guarantee useless.

Examples

Here are two real-life examples where a personal guarantee could go wrong:

a) In order for a personal guarantee to be enforceable, it must be in writing and properly executed by the guarantors.

Whilst Digital commerce has brought a lot of changes to the way businesses operate these days, it also brings issues surrounding electronic signatures. The use of electronic signatures creates a lot of uncertainty and room for argument on whether the personal guarantee is executed validly by the intended individuals, especially if the creditor was communicating with the guarantors through agents.

b) Personal guarantees tend to be interpreted strictly by judges, so it is crucial to have a well-drafted personal guarantee that clearly sets out the extent of the guarantors’ obligations. A good example is where creditors receive payment in full from companies, but the companies subsequently become insolvent and the appointed liquidator exercises the power to claw back that payment. The creditors may find themselves out of pocket and yet the obligations of the guarantors have already been discharged.

If you are providing credit to another, it is crucial that your personal guarantee contains clauses to protect you from something like that.

A few more things to know before signing a personal guarantee

If you are asked to sign a personal guarantee, you should always understand the terms and conditions and obtain legal advice to interpret the personal guarantee for you if you are ever in doubt. For instance, you should know if there is any limit to your liabilities and if you have any recourse available to be discharged as a guarantor.

When people are asked to provide a personal guarantee as a director of the company, they sometimes confuse that their liability ends when they exit the company and resign their position as a director of the company. Resignation does not necessarily prevent creditors from taking action against guarantors in the future in reliance on the personal guarantee.

You should be proactive and take steps to inform the creditors of your resignation with a view to discharging your guarantee. At Ryan Murdoch O’Regan, we can help you negotiate with the creditor so that you can have peace of mind.

Key Takeaway

The devil is in the details, personal guarantees must be carefully drafted to ensure their valid operation no matter the circumstance.

Ryan Murdoch O’Regan can assist you whether you are preparing a personal guarantee or you are asked to provide one. Speak to one of our lawyers so that you know your rights and obligations.

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This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.