A personal guarantee is a legal commitment made by an individual (the guarantor) to repay a loan or debt if the primary borrower defaults. This means that if the business or individual who took out the loan cannot pay it back, the guarantor is personally responsible for covering the debt. This often involves putting personal assets, such as property or savings, at risk.
Giving a personal guarantee broadly means that if your business (as a borrower) defaults on its liabilities to the lender, then the lender can turn to you personally and require you to meet your business’s liabilities to the lender. Therefore, your personal assets are put at risk to the extent that your business is unable to meet its liabilities to the Bank. If your business defaults on its liabilities to the lender and you are not in a position to pay any sums due under the guarantee then the lender could seek to bankrupt you by virtue of this arrangement.
Independent legal advice is crucial when signing a personal guarantee for several reasons:
- Informed Consent: It ensures that you fully understand the terms and implications of the guarantee. A lawyer will explain the risks and obligations involved, helping you make an informed decision.
- Conflict of Interest: An independent lawyer, who has no stake in the agreement, can provide unbiased advice. This helps protect your interests and ensures that you are not being pressured into signing
- Enforceability: Having independent legal advice can make the guarantee more enforceable. It demonstrates that you understood and willingly accepted the terms, which can be important if the agreement is ever challenged in court
- Risk Awareness: A lawyer can highlight potential risks and liabilities that may not be immediately obvious, ensuring you are fully aware of what you are agreeing to
Banks and other lenders will often ask you to get independent legal advice from another solicitor on the terms and effect of the proposed personal guarantee.
In general terms, in an ideal world, I would always advise that people should avoid giving personal guarantees where they can. However, commercial reality dictates that if your Business requires the loan, and the Bank will only provide it if supported by the security from the company and by your personal guarantees, then you have to decide whether your Business obtaining the loan is worth you giving the guarantee. Given that you probably depend upon your Business for your income then it is presumably the case that you need the Business to have the loan in place and therefore will have to provide the lender with the security requested.
That said, you do have a choice. You do not have to give the guarantee if you do not wish to do so but you must bear in mind the consequences this will have in terms of the lender providing lending facilities to the Business. It is also worth noting that other lenders may not (or indeed may) require a personal guarantee.
My task as an ILA Solicitor is to provide you with independent advice on the personal guarantees and I have to provide the lender with a certificate confirming that. Usually, I will have to confirm your identity as well and confirm that you are entering into the agreement of your own free will and without undue influence. Often, when we do ILA’s remotely, I will have to observe the witnessing of the document (that is, someone physically present witnesses your signing, and I watch online).
So, if you are having to give a personal guarantee to a lender and require independent legal advice, get in touch.
