Many business owners are seeking extra financing after the pandemic, but with times being so uncertain, the majority of lenders are becoming increasingly hesitant to provide funding without adequate repayment safeguards in place.
Hand in hand with this the number of directors who are being pursued, or believe they will be, for claims under Personal Guarantees are increasing, so many are wondering how best they might respond to such claims.
What is a Personal Guarantee? How do They Work?
Personal Guarantees are simply a way that a lender can be assured of repayment if a limited company cannot repay any loan. This is because a Guarantor (usually a company Director) agrees to be personally liable for the company’s debts if they cannot meet the repayments for one reason or another, for instance, if the company is dissolved.
As you can imagine this system is used by lenders in the majority of cases, it giving them the ability to sidestep any insolvency processes the company may take , or be forced to take.
Why Directors Should Be Concerned About Agreeing to a Personal Guarantee?
Quite simply, by personally guaranteeing company loans, Directors put their personal finances in the direct firing line, this leading to them possibly losing their homes or perhaps even being forced in to personal bankruptcy.
Can Personal Guarantee Claims be Challenged? Yes.
There can be little doubt that receiving a personal guarantee claim is not something that anyone would be looking forward to. But there is hope as there are ways of challenging these personally guaranteed obligations.
The first thing to look at is whether the many requirements that have to be met when Personal Guarantees are to be enforced are indeed in place:
- The form of the personal guarantee: The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee must be in writing and signed by the Guarantor or a person authorised by the Guarantor.
- It must be signed: The Guarantor must sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature.
- Secondary Liability: It has to be established that the Guarantor has what is known as secondary liability and the ability to perform the guaranteed obligation.
- Consideration: The signed document must satisfy the requirements of any other contract in that there should be adequate ‘consideration’.
If any of these is absent, the executed document may not be enforceable.
Other Ways to Challenge a Personal Guarantee Claim
There are some other ways of challenging Personal Guarantee claims, especially when they fall within one of the below categories:
- Misrepresentation and/or Undue influence – If it can be proved that the Guarantor had been substantially misled (perhaps due to undue influence or misrepresentation by a third party).
- Repudiation – The creditor in some way could have, perhaps unwittingly, repudiated the terms of the Personal Guarantee.
- Variation of terms – In some cases oral or written variations to the Personal Guarantee may have been made. If these affect the terms of enforcement, such as extensions of time given, these may raise the possibility of a successful defence.
- Legal advice – Before any guarantee is signed, it may have been incumbent on the creditor to inform the prospective Guarantor to take independent legal advice. If such advice was not given, it may allow the Guarantor legitimate grounds to dispute the Personal Guarantee Claim.
What to do When Facing a Personal Guarantee Claim
As you can see, it is not always an open and shut case for creditors, they may not be able to enforce a Personal Guarantees Claim, so if it happens to you, the best course of action is to talk to a specialist like NDandP.
Specialist firms like NDandP often come across documents that purport to be Personal Guarantees, which upon closer examination are poorly laid out and which therefore can be successfully challenged.
Good Old Fashioned Negotiation is the Key
The following methods have proven to be an enormous benefit and are very powerful negotiating tools in negotiating directors out of any liabilities:
Director Not Able To Pay
If the director is not really going to be able to pay, no creditor will want to throw money at the problem by incurring legal expenses at the problem when they have indicated that they are going to oppose a Personal Guarantee Claim, or where there can demonstrate inability to pay the Personal Guarantee Claim (looked at in isolation) or inability to pay, looked at in the context of allthe Guarantors debts.
Where the claim cannot be totally avoided, it is often possible to arrange ‘time to pay’ settlements which at least allow the director to continue with their lives.
Indicating The Possibility of Personal Bankruptcy or Individual Voluntary Arrangement (‘IVA’) for the Guarantor
Suggesting that the director could enter into personal bankruptcy or an IVA can often be a sensible option for the debtor. These have in many cases led to an improved offer from the creditor.
However, this is not always an easy thing to achieve and the creditor can take some persuading, this again means that using a specialist company is a necessity in most cases.
So, if you are facing a Personal Guarantee Claim, do not feel all is lost, just pick up the phone and talk to someone like NDandP who will be able to help you.
