10 Secrets to Avoid a Director's Personal Guarantee

What is a Personal Guarantee?

Challenging a creditor’s right to call in a personal guarantee

Can I get out of a personal guarantee?

The History Behind Personal Guarantees (PGs)

Back in the day when the idea of limited companies first appeared in England in the 1600s when Queen Elizabeth 1 allowed the formation of the East India Company where individuals joined forces to explore/exploit the eastern empire territories. There had been companies earlier in Japan, Denmark, Italy and China.

But the novel idea was that companies could limit the liability of their ‘members’ or shareholders as we call them today. This allowed the Industrial revolution in Britain to be the fastest growing and most powerful in the world due to the fact that liability for the actions of the individual ‘persons’ could be limited. In the past, there were examples where shareholders had made a joint venture that went wrong and their liabilities were unlimited. After the scandals of the past no one wanted to invest in the new opportunities arising everywhere.

The original Limited Liability company

So they came up with the idea of a limited liability company, where as long as the members acted in good faith, the losses would be limited to the amount of share capital in the company. Now with a personal guarantee your personal assets are at risk. But all is not so simple for the creditor as we shall see - sometimes the business owner can avoid their PGs.

Of course wily entrepreneurs soon found a way around this and so the banks became the ones wary of investing. In order to counter this, banks started to look at the individuals inside the company and say ‘well we are lending money to the company but we’d like someone to go after if the company folds and we lose our money’.

This was the start of the personal guarantee, something which banks come to rely on more and more. The members or shareholders of a company would personally guarantee the debts and liabilities of the company. This gave the banks full comfort that they could always go after directors or shareholders to claim their assets. Hence the expression losing the farm. Countless individuals have lost their homes and other valuable personal assets do the Personal Guarantee (PG) given as company directors of a limited company listed at Companies House.

However, few small business owners understand that when taking out business finance or alternative funding (like Funding Circle small business loans) in the modern world there is a huge difference between the regulations for lending money to a business or corporate entity and lending to a person as n individual. Believe it or not, the moment the bank moves outside of the company for a guarantee it enters into the tricky (for the bank) world of consumer finance. If at any time you feel you can void your personal guarantee for one of the reasons below you should seek legal advice. (Contact info below).

And, wouldn’t you like to know, consumer finance is the personal guarantor’s best friend when it comes to avoiding losing everything after the failure of your business.

Can I walk away from my Personal Guarantee?
Yes.

It is always nerve racking when you receive a demand to pay under a business personal guarantee. All is not lost however and with proper advice they can often be reduced considerably or avoided altogether.

There's a bunch of things to consider when thinking about challenging a personal guarantee.

The following is by no means an exclusive list and is an overly simplified run through in order to give you a flavour of what you can expect:

The following is by no means an exclusive list and is an overly simplified run through in order to give you a flavour of what you can expect:

1. Equity

You need to understand that certain principles govern personal guarantees and that breaching those principles can invalidate the guarantor, leaving the Principal with no claim against the Guarantor. For example:

• – E.g. 1: altering the terms of the guarantee without the consent of the Guarantor can invalidate a Personal Guarantee; and
• – E.g. 2: in cases of any ambiguity the contra proferentem rule will be employed in order to interpret less than straightforward terms in a personal guarantee - often in favour of the Guarantor and against the Principal.
  
  

2. The Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”)

The UTCCR is legislation, which can be deployed to avoid a personal guarantee if the circumstances are correct. Typically, it can be used to release a spouse of a company director when he/she is not involved in the business.

3. Personal Guarantees must be written and not verbal or oral.

A personal guarantee has to be in writing. It must also be executed as set out in the Statute of Frauds 1677. The formalities of this are in fact scarce.

4. Demand

Any demand made by a Principal has to satisfy the contractual terms of the personal guarantee and be otherwise valid.

5. Has the personal guarantee already been released by the creditor?

A personal guarantee can be released by the creditor if for example the facility for which it was created has been released or the circumstances now surrounding the alleged personal guarantee do not support its continuing existence. This is largely a matter decided by a judge in court and on the facts of the case.

6. Secondary “See To” Personal Guarantees

See To personal guarantees are not calls for a specific amount or figure but for a loss and these are therefore subject to the legal obligation that the Principal is under an obligation to mitigate its loss prior to making demand.

7. Common Sense

According to Lord Diplock (see: Antaios Compania Naviera SA v Salen Rederierna AB [1985] A.C. 191) “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”.

8. Set Off

You may be owed money by the Principal and be able to set these off against its claim against you. Such claims can be complex like those relating to the recent scandal of hedging interest rate swaps.

9. A personal guarantee can only be given for consideration

Personal Guarantees can often be avoided using this tool if a personal guarantee is given on an existing loan when the bank is unable to call it in lawfully.

10. Misrepresentation

The guarantor is automatically released under this principle if he/she was caused to enter into the personal guarantee in reliance upon a misrepresentation known to the Principal (see: London General Omnibus Co v Holloway [1912] 2 KB 720). This kind of misrepresentations may be to the nature of what is being guaranteed or even the underlying debt between the company and the bank.

11. Coercion - someone made me do it

Not just a fantasy, but the courts have recognised that certain people enter into personal guarantees through coercion and the test for this is surprisingly light. No pressure tactics are required just a marriage certificate.

But that's another story.

12. How to cancel a Personal Guarantee before it is called in

The magic wand, is to remove a personal guarantee. One element of a personal guarantee that is often forgotten is that the personal guarantee is a financial instrument which offers protection. The personal guarantee is not governed by corporate law but rather by Consumer Protection, The Unfair Terms in Consumer Contracts Regulations and the Consumer Rights Act 2015. If you are no longer a connected party you have the right to cancel the personal guarantee.

There are lots of prerequisites and you should get our lawyer to review your personal guarantee and write the cancellation.

You can contact our preferred Personal Guarantee experts here:
[email protected] 02037523446

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