We often get asked by clients about personal guarantees in business. They usually want to know if it will help their business get credit and what it means to be a guarantor. Some businesses cannot get loans or credit without a guarantor. So, what does this mean for your business or you personally?
Giving a personal guarantee in any sense can leave you personally liable for the debts of your business. Often people create Limited companies to avoid any personal liability so by giving a guarantee, you are opening yourself up to your personal assets being at risk if the business cannot make the payments necessary to discharge its liability.
Most lenders will now ask for a personal guarantee from the Director/s and or the shareholders. Why? Because the bank will want to have some security because the company is lending a large amount or is newly formed. This is especially true if the business is just starting up. Personal guarantees are sometimes therefore unavoidable and are difficult to dispute. So what do you need to know?
What happens if you have given a personal guarantee and didn’t know this was what you were doing?
If you were not advised that you were agreeing to a personal guarantee or were not advised to seek independent legal advice, you may be able to dispute this. However now most lenders will insist on you obtaining advice from an independent solicitor as a term of lending to avoid any issues later on. To establish if you have a claim, a solicitor would need to examine your paperwork to see what you were told about the guarantee and how you came to sign the documents.
The Company have defaulted but the lender hasn’t tried to recover the money from the company first.
The guarantee means that the lender can come after you if any payments are missed. There is no requirement on the lender to seek the money from the company first.
The guarantee was for a smaller sum, now I am being asked to repay a lot more.
Some guarantees are open ended meaning the amount loaned to the company can be increased without your authority. This will depend on the guarantee you have signed.
I signed the guarantee years ago and the company does not exist now. Am I still liable?
Yes. You have signed as a personal guarantor and the security may be a ‘continuing security’, which means this simply does not end until the debt is paid even if you cease to be a director or shareholder!
In an article called Company Rescue, we found that once the implications of being a personal guarantor have been explained to a client they are at least prepared and know their full liability should the worst happen.
If you are thinking of starting a business but are being asked to give a personal guarantee – STOP – speak to a solicitor or legal advisor first so you know exactly what you are doing.
Don’t delay – call Maxwell Hodge solicitors today for advice.