If you are a director of a limited company that is considering arranging finance in the company's name such as a business loan or an overdraft facility from a bank or another lending institution then the lender may make it a condition of their support that you, the director, are required to provide a signed, written personal guarantee (PG) as part of any security arrangements. Lenders often require such a guarantee when providing business finance to bolster their security thus reducing their risk.
What is a personal guarantee?
It is a legal agreement made by say a director who agrees to be liable for paying a third party's debt such as his or her company's business loan with the bank should the company be in the unfortunate position of being unable to pay it itself. The director is known as the "guarantor".
Such a guarantee can either be given without
supporting security being provided by the guarantor or with supporting security
such as a legal charge over the guarantor's family home.
This can be provided by one or more than one individual.
What are the consequences of providing a PG?
It could mean that, if your company went into liquidation and was unable to meet its financial obligations, the lender could try to enforce the guarantee to clear/reduce your company's indebtedness. This means that you would need to realise some of your assets sufficient to clear your liability under the guarantee that could, in certain situations, result in you having to sell your family home. If you did not have sufficient monies to liquidate the liability, it could lead to you being declared bankrupt thus affecting your credit rating and being unable to act as a company director unless with the agreement of the court.
Some things to consider:
- It would be preferable if the bank agreed to
lend your company the money you require and rely on other security such as a
charge over the business premises or a mortgage debenture over the assets of
the company rather than also taking a personal guarantee.
- If you are unable to negotiate this and the
bank insist on you providing a personal guarantee then you should consider
obtaining independent legal advice. In fact, some lenders may insist that you
do this anyway so that you cannot claim that you were unduly influenced should
the bank seek to call on the guarantee. If you are providing supporting
security such as a charge over the jointly owned matrimonial home then your
spouse/partner will also have to obtain independent legal advice when agreeing
that the home can be used as security.
- Wherever possible, it would be preferable if it
were agreed with the lender that the personal guarantee was in respect of a
specific liability such as a loan as opposed to "all monies covering all the
company's borrowings.
- Failing that, it would be preferable if a cap could
be agreed on the amount of the director's liability under the guarantee.
- It would also be preferable if the guarantee
had a clause in it enabling you to terminate it having given due notice if, for
instance, you were to leave the company.
- Also, you may wish to try to have a clause in the
guarantee stipulating that the bank enforces other assets that the company owns
before calling on the guarantee.
- If more than one director of the company is
providing a guarantee then, although there are other potential options, this is
usually in the form of a joint and several liability arrangement. With this
type of guarantee the lender can call on either one or more of the guarantors.
- A guarantee often includes indemnity
terminology to provide the lender with additional protection should the guarantee
be discharged. Therefore, it would be preferable from a director's perspective
if such terminology were not included.
- A guarantee is normally a continuing form of
security with no agreed end date.
- Bear in mind that, if the company was to have financial problems, it should not pay off the bank that it has given a guarantee to in preference to its other creditors.
Summary
Whilst it would be preferable for your company to be able to borrow the required funds without the need for you to have to provide a personal guarantee, you may be faced with little alternative if you need to borrow monies to help grow the business. In which case, you should consider obtaining independent legal advice so that you are fully aware of what you are entering into as a creditor will not hesitate to enforce the PG you have given should it become necessary to do so. Try to negotiate with the lender about what clauses are to be incorporated within the personal guarantee to your personal advantage.
