A personal guarantee is a document requested by financial institutions when lending money to a limited company or partnership without adequate security.
For many businesses, finance can mean achieving optimum growth and going under but, for obvious reasons, lenders are cautious about agreeing loans without adequate collateral as security. When a business has none to offer, the personal guarantee document allows a member of the company to offer a personal asset, often a property, as loan colllateral.
Are Personal Guarantees Legally Binding?
The short answer is yes, in most cases.
UK company law traditionally maintains a clear distinction between corporate and personal assets. This divide is known as the ‘corporate veil’ and it is intended as a protective mechanism for directors. Should a limited company become insolvent, the directors personal assets are generally safe because of it. Insolvency law means that while the company assets may be liquidated and the business closed, he or she would not lose their house or have to declare personal bankruptcy.
A personal guarantee is a document with one intention which is to circumvent this corporate veil and make a personal asset security for business finance.
What are Limited Personal Guarantees?
If the personal guarantee is required for business finance, it may be that more than one member of the firm agree to sign the document. This can be arranged in two ways:
A Several Guarantee
A several guarantee means that the obligations are divided between several individuals, on a percentage or proportional basis. This means that some members may assume more responsibility for the debt than others.
Joint and Several Guarantees
These mean that anyone who signs is held equally responsible, and could be held responsible for the entire debt. If one of the business partners disappears for example, the remaining assume full responsibility.
What are Unlimited Personal Guarantees?
An unlimited personal guarantee means you have assumed full responsibility for the total loan amount should any obligations not be met. It is the most risky situation for a director to be in, since it fundamentally ties personal assets alongside the success of the business.
These are the guarantees where personal guarantee insurance really makes sense, because while businesses generally begin with great optimism, insolvency is an all too common event.
Does Signing a Personal Guarantee Affect Credit Rating?
Signing a personal guarantee should have no impact whatsoever on your personal or corporate credit rating.
Can I get out of a Personal Guarantee?
It is extremely difficult to get out of personal guarantees, though in some cases it can be done. The likely scenarios where a lawyer could extricate a client from a personal guarantee include the following:
Misrepresentation – where you have been induced to sign the PG document under false pretences
Duty of Good Faith – This complex line of argument involves asserting that, due to a longstanding relationship between bank and client, where the bank was giving advice, a duty of good faith has been created. If it can then be argued that the bank has breached that duty, it might be possible to throw out the personal guarantee clause.
Promise – Where the bank or financial institution has stated in writing that it will not enforce the guarantee in a certain situation, then it may be possible to throw out the guarantee on the basis of contravening a legally binding promise.
Error – Where the PG document does not reflect the accurate relationship between yourself and the company or indeed the bank, it may be possible to argue that an error precludes the legal validity of the guarantee.
Force and Fear – If an individual is forcibly compelled or pressured into the signing the PG document, a lawyer may be able to throw out the guarantee on the basis of ‘force and fear.’