MBM Commercial’s Dispute Resolution team have a long history of acting against large institutional lenders in matters relating to bank’s actions amid the 2008 recession and we have recently been involved in a number of cases involving banks calling up personal guarantees despite assurances that may have been given during COVID-19.

Thankfully, and as outlined in one of our previous blog posts, many banks have not been requesting personal guarantees for loans below £250,000 during the COVID-19 Pandemic. However, as things are now starting to open up and businesses are getting back on their feet, banks may soon begin making requests for personal guarantees as security over loans.

What is a Personal Guarantee?

A personal guarantee is an agreement between a lender and an individual (or individuals) in which they take personal liability for a debt(s) in the event that they cannot be paid back by the individual(s) themself. One common example of this would be an individual, who is also a director of a company, agreeing to a Personal Guarantee in respect of a company loan by lender.

Issues tend to arise when a lender calls in a personal guarantee and you are unable to pay, which could result in sequestration or bankruptcy.

What should I consider before agreeing to the terms of a Personal Guarantee?

There are many things that you should consider before agreeing to the terms of a Personal Guarantee.

1. Do you intend to be personally liable for the repayment of the Personal Guarantee?

Personal Guarantees are often granted when the lender takes security over an individual’s assets to ensure they can repay the Personal Guarantee if called. These can often include the family home; however, it is important to note that, if the individual co-owns their home with their spouse, they should both seek independent legal advice before agreeing to the terms.

Further to this, the individual must acknowledge and understand that there is a real possibility that the Personal Guarantee may be called up. In the recent English case of Kerkar v Investment Opportunities IV PTE Ltd [2021] EWHC 3255 (Ch), the individual signed a personal guarantee in relation to one of his companies, Prometheon Holdings (UK) Limited, and the creditor was claiming sums owed within a Statutory Demand. The individual, Mr Kerkar, stated that he understood that the personal guarantee was not going to be called upon as it was “purely procedural”. However, the Judge rejected this position and said the following:

“I find it inherently implausible that a man of Mr Kerkar’s extensive business interests would have been prepared to rely on a statement, the meaning of which was not clearly articulated, made four months earlier, in relation to a different lending arrangement, that contrary to the clear and express wording of the agreement he was about to sign, it would not seek to rely upon his personal guarantee. There is nothing to negate the express agreement contained in the guarantee.”

Whilst there are slight differences between Scots and English law, it is clear that you should always understand exactly what you are agreeing to and what rights a lender has in respect of recovering any loans that were provided with a personal guarantee. For further comment on the differences between Scots and English law relating to Personal Guarantees, please see a previous blog post on this following the successful Supreme Court case of RBS v Carlyle.

2. Is there Joint and Several Liability within the terms of the Personal Guarantee?

Using an example of a company with multiple directors, it is important to read the terms of the Personal Guarantee as the directors may be joint and severally liable for repayment under the Personal Guarantee. By this, it is meant that the lender can pursue any or all of the individuals for repayment of the debt. However, if there were two directors, whilst it is common practice that the lender would look to recover the debt on a 50:50 basis, if one director is unable to do so then it is possible for the lender to seek to recover the debt entirely from one director.

3. Has there been a limit imposed within the terms of the Personal Guarantee on how much a lender can pursue the guarantor for?

It is important to consider whether the amount a lender can pursue the guarantor for has been limited to a certain amount or if the guarantor is liable for repayment of the entire debt to the lender. This, however, may not include the costs that a lender will incur to pursuing an action to recover their monies. It is important to check the terms of the Personal Guarantee to confirm whether the guarantor can be pursued for costs.

4. Has liability to repay the debt prescribed?

In certain circumstances, a debtor’s liability to repay sums due under the personal guarantee may no longer be enforceable due to the passage of time. For example, if a lender has issued a demand for repayment under the guarantee, payments have not been made and more than five years have passed since the date of the demand, it may be possible to argue that the obligation to repay the debt has extinguished. Specific legal advice is always required in these circumstances.

If you require expert advice, then contact us or call 0131 226 8200 to speak to one of our team today. We will be more than happy to have an initial no-cost chat to discuss your case and see if we can help.