Guaranteeing Company Obligations – Don't Let It Get Personal

We were recently approached by a client asking if we could help to extricate him from a personal guarantee - a guarantee which, prior to it being called on, he had not realised he had given. By signing the relevant box in a document entitled "Application for Credit Account", our client thought that he was entering into an agreement pursuant to which his company would be granted credit terms by a supplier, an essential component to the smooth day-to-day running of the company. In fact, he and his fellow directors had also unwittingly agreed "jointly and severally to guarantee payment of all the financial obligations (of the company) due to" the supplier - in effect, a personal guarantee.

Therefore, without being provided with a document calling itself a "Guarantee" or even having his attention drawn by the use of the word "personal" within it, a director may find himself personally liable to pay his company's debts and if he does not do so when required, he may be taken to court and ultimately face enforcement of a judgment debt against his assets, including the family home. In our client's case, the devil was in the detail - or, rather, buried in the small print.

Is this commonplace?

It is not unusual in the construction industry for an employer to require a parent company guarantee in order to receive the benefit of some form of security in relation to a company's obligations. However, banks, landlords or even suppliers may agree to deal with smaller, owner-managed companies only if its obligations are backed up by a personal guarantee from the individuals behind it. This may be particularly pertinent, for example, where a new company is keen to get its business up and running.

If you have ever been asked to provide a personal guarantee by, for example, a bank, you will most likely have been provided with a separate guarantee document which clearly identifies itself as a "Guarantee". You may also have been required to take independent legal advice on the guarantee.1 In this way, individuals are (or should be) fully aware of what they are signing up to.

However, there is no reason why a guarantee may not be contained within another agreement. Further, if the creditor is not a financial institution subscribing to a particular lending code or adhering generally to best practice, he will not feel bound to comply with any of the "protections" potentially afforded to guarantors under such codes of practice, such as a commitment not to take an unlimited guarantee from an individual and ensuring an individual takes separate legal advice. He may instead require a personal guarantee as standard practice regardless of credit rating and just see if he can get away with it by documenting it in his credit agreement.

In the absence then of reading and fully understanding the implications of the small print, it may prove surprisingly easy to find yourself "on the hook" as a personal guarantor.

What constitutes a guarantee?

The law of guarantees is complicated and the purpose of this article is not to provide an in-depth study of that area of law. However, it is still helpful to have an understanding of what a guarantee is and how it can be given.

A guarantee is an undertaking by one party to another promising to be responsible for the payment of debt or performance of obligations by the person primarily liable. The liability of the guarantor is a secondary obligation which is contingent on the existence (and usually breach) of the primary obligations owed by the principal obligor to the creditor.

The basic requirements of a contract governed by English law apply to the formation of a guarantee: i.e. offer, acceptance, intention to create legal relations and consideration if not contained in a deed. The Statute of Frauds 16772 stipulates that a guarantee must...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT