Personal Guarantees are often required where a limited company enters into new financial obligations, or where there is concern that an individual entering into new obligations may not have sufficient financial standing to meet those obligations.

 

Some examples of when a Personal Guarantee may be required include:

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• When taking out a new mortgage, development loan, business loan, overdraft, credit card or other borrowing facilities

• When entering into a new lease of a premises

• When buying a business, the purchaser may require the seller to give a Personal Guarantee in respect of any warranties or obligations of the seller, especially where the seller is a limited company that may cease to exist following completion of the sale

• When selling a business, the seller may require the purchaser to provide a Personal Guarantee where the purchaser is a limited company and the purchase price is due to be made in instalments following completion.

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In every case, the person giving the Personal Guarantee will be providing security for the obligations of another party without receiving any direct benefit in return. Whilst there is often some indirect benefit, this may not always be the case and in all cases, the person entering into the Personal Guarantee will be taking a personal risk.

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It is essential that any person giving a Personal Guarantee understands the obligations they are assuming and the risk they are taking. As such, the party benefiting from the Personal Guarantee will often insist on the guarantor receiving independent legal advice before proceeding. This is to ensure that:

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• The guarantor understands the documents they are entering into and the risks involved

• The guarantor is not entering into the Personal Guarantee under any pressure or undue influence from the party whose obligations they are securing, and who will be directly benefited from the guarantee they are providing.

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In practice, the best way for the independent legal advisor to be certain confident that the guarantor is on their own and not being influenced during the meeting is to meet with the guarantor on their own and preferably in person. The only exception to this may be where the person giving the Personal Guarantee is the sole owner and sole director of the company entering into the loan, lease or other agreement.

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If you have been asked to provide a Personal Guarantee for any purpose, please speak to us before proceeding.