Enforceability Of Personal Guarantees

• Published date: 07 July 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Debt Capital Markets, Financial Services, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Herrington Carmichael
• Author: Ms Annabelle Randell

Personal Guarantees

A personal guarantee is a legally binding obligation on an individual to repay a third party's debt or borrowing. Effectively, if a company or primary debtor does not pay or is unable to pay a debt, then a creditor, for example a lender will become entitled to pursue an individual guarantor for repayment of the debt through the courts. This could even lead to personal insolvency if the guarantor is unable to pay.

Personal guarantees are a common feature of many financial products including business, loans, overdraft, and credit cards. The most common is a director's guarantee whereby a director of a limited company will personally guarantee the repayment of a loan made to his or her company.

Given the personal ramifications on signing a personal guarantee, it therefore cannot be emphasised enough just how important it is for an individual to fully understand the personal financial implications of signing a personal guarantee before agreeing to do so. In particular, a person individual must be made aware of the potential risks and consequences to their personal assets when a primary contracting party (over whom they may have no direct control) defaults on a loan which they have ultimately personally guaranteed the re-payment of.

When might a personal guarantee be unenforceable?

With such draconian sanctions on a personal guarantor for the repayment of a third party's debt, one might question whether there is any defence or legal mechanism available to get out of one's strict guarantee obligation. In essence, the answer, as is often the case is: 'it depends'.

Firstly the courts, who are tasked with entering judgment against a guarantor to repay a defaulted debt, will look at the period of time which has passed since the guarantor's legal obligation to repay the borrowing took effect. A lender has 6 years (or 12 years if the personal guarantee is contained in a deed) within which to bring any legal action, after which they become statute barred from doing so.

Secondly, if a guarantor can evidence that the guarantee was entered into due to a fraudulent or negligent representation, the courts may find that the personal guarantee is void...