What is an unenforceable personal guarantee?

Is your personal guarantee unenforceable and how can you challenge it?

As a company director, you may have to provide a personal guarantee to secure business borrowing or underpin a commercial tenancy agreement. At the time, you might not think much of it. However, if you default on the payments or the business fails and it cannot repay the debt, that personal guarantee could potentially put your home and other personal assets at risk. 

If you find yourself in this position, you should always check that the personal guarantee is enforceable. There are certain situations where a guarantee may be deemed unenforceable, and that could get you off the hook as a guarantor. Here we explore what an unenforceable personal guarantee is, what factors might make it unenforceable and how you can challenge it.   

What is a personal guarantee?

A personal guarantee is a legal commitment that one or more directors will repay business borrowing if the company cannot. By giving them an extra way to recover the money, it mitigates the risks for the lender in the event of your company becoming insolvent and helps you secure vital funding for your business.   

Personal guarantees often come with certain conditions. For example, they may only cover part of a loan or apply for a limited period. If more than one director signs a guarantee, they are usually joint and severally liable, which means the lender can enforce the guarantee against one or both directors. The lender will not necessarily target the directors equally. Instead, it will usually focus on the director with more financial resources and high-value assets. 

How enforceable are personal guarantees?

As long as the guarantee is in writing and is signed by a guarantor with the intention and capacity to sign it, there won’t usually be any problems for the lender. Even if you resign from the company or close it down, the lender will still usually be able to enforce the guarantee.

If the company defaults on a finance agreement or enters into liquidation proceedings, the lender will usually write to the guarantor to request the payment. If you do not make the payment, the lender can seek a court judgment to enforce the guarantee, and at that point, your personal assets could be at risk. 

When are personal guarantees unenforceable?

An unenforceable personal guarantee is one the lender cannot call in when the company is unable to pay a debt. Several factors can make a personal guarantee unenforceable:

• You were misled - The creditor did not give you the full facts or there was an element of misrepresentation or fraud that affected your decision to sign the guarantee. 
• Key information was omitted - You did not receive key information that has a direct impact on your relationship with the lender. 
• There’s an illegality - The transaction the guarantee stems from or the terms contained within it are illegal in some way. 
• It was not executed properly - The guarantee has signatures missing, there was no witness present when you signed it or it contains ambiguous language.
• The facility has changed - The lending facility changed significantly in the time between you signing the guarantee and the creditor’s claim, and you were not informed about the changes.
• A condition has not been met - A condition was included in the contract that has not been fulfilled.
• The statute of limitations has passed - The creditor does not commence proceedings to recover the debt in time. They have six years in most debt recovery cases but 12 years if the personal guarantee is considered a deed.  
• The terms are unfair - The contract contains a term that is unfair according to the Unfair Terms in Consumer Contract Regulations (1999). In this case, you could challenge the guarantee in court. If the creditor thinks they might lose and doesn’t want to incur the legal costs, they may choose not to enforce the guarantee. 
• The terms are unclear - You could have grounds to challenge the guarantee in court if any of the terms are ambiguous or unclear. 

Most lenders now require all prospective guarantors to seek independent legal advice before signing. If you receive legal advice, you’re less likely to be able to successfully challenge the guarantee. 

How do you challenge a personal guarantee?

If you want to challenge a personal guarantee that has been called in, you need to act quickly. That will give you time to consider the potential routes for a challenge before enforcement begins. 

Given the high cost of litigation, you must have genuine grounds to base your challenge on. If you do, lenders will usually be reluctant to go to court as it could set a dangerous precedent that affects thousands of guarantees they hold. As a result, they may be willing to reach a settlement which will reduce your liability.   

Can I get out of a personal guarantee?

If a personal guarantee you have provided has been called in and you think it’s enforceable based on the points in this article, there are some practical steps you can take:

• Check for personal guarantee insurance - Personal guarantee insurance can cover up to 70% of the liability of new and existing finance agreements. 
• Negotiate - Lenders will prefer to avoid court action if they can. If you can’t afford to pay what you owe upfront, try to negotiate a lower amount or ask for more time to pay. 
• Enter into an Individual Voluntary Agreement (IVA) - Entering into a formal debt agreement called an IVA will allow you to pay what you owe over a typical period of five years. It will have a serious impact on your credit score but could help to protect your assets. 

Need advice?

If your company cannot pay its debts and you’re worried about a personal guarantee you’ve provided, we can help. Please call our team of licensed insolvency practitioners for a free, same-day consultation or arrange a meeting at one of our offices throughout the UK.