The primary concern for many directors at the moment will be the financial position of their companies; however, it is important that directors also consider the personal risks created by the coronavirus pandemic, including the impact of any personal guarantees.
Personal guarantees are often given by directors of small to medium sized businesses to secure bank loans, property leases, asset leasing arrangements and invoice financing arrangements. They are often given at a time when the business is doing well and the risk of the company being unable to pay its debts, or the guarantee being enforced, seems very low. However, these are unprecedented times and the global economy has been pushed into a state of turmoil.
The risk of company insolvency has significantly increased as a result of the pandemic and so too has the personal and financial risk for directors. This includes the risk of personal guarantees being enforced against them.
Personal guarantees from directors are a contractual promise to pay the debts of the company in the event that the company is unable to pay the guaranteed debt. If there are multiple guarantors, liability under the guarantees is normally joint and several: each person signing a guarantee can be pursued for the full debt in the event of a default by the company.
If you are a director, or a business owner, with concerns about the impact of a personal guarantee, we recommend the following steps:
- Your liability under a personal guarantee will be dependent on the company’s underlying obligation to pay the debt. Review the primary agreement with the company; check that the agreement is enforceable and make sure you understand the company’s payment obligations.
- Check that the underlying debt is immediately due and payable.
- Carry out a detailed review of the written guarantee document and make sure you understand the terms of the guarantee. Is there a cap on liabilities? Can interest be claimed on the underlying debt? Are the terms of the guarantee sufficiently clear and complete to take effect and to be enforceable against you? Do you have a right to request further information from the lender?
- Are there any co-signatories?
- Consider whether there are any grounds to challenge the personal guarantee. Does the guarantee comply with the necessary formalities? Was independent legal advice taken before you signed the guarantee? Were any inaccurate explanations provided to you by the lender at the time that the guarantee was entered? Are the terms of the guarantee fair and reasonable, or do they fall foul of Unfair Contract Terms legislation?
- Consider whether there is any scope to renegotiate terms, or agree a repayment plan, with the lender.
- Be pro-active and seek early legal advice.
Druces LLP’s Dispute Resolution Team regularly advises lenders and directors on the enforcement of personal guarantees. We understand both sides of the coin and have the expertise to advise on all the issues, including providing advice to assist you in understanding your rights and obligations, advice on renegotiating terms, drafting repayment agreements and assisting with litigated disputes.
Entering into a new guarantee
On the other side of this issue are the companies which are looking for new financing (or refinancing of an existing debt) in order to survive economic difficulties arising from the pandemic. A director may be asked to give a personal guarantee for the company’s debt as a condition to the finance arrangement.
Given the current economic climate, a personal guarantor will want to limit their risk and exposure as much as possible. If the lender insists on a personal guarantee, the following points should be considered:
- Check whether there is a cap on liability. A personal guarantee should not necessarily extend to the entirety of the underlying debt if there is other valuable security.
- Look at the termination provisions of the guarantee. Ask whether it is possible for the guarantee to be time-limited, or to fall away when certain financial tests are met.
- Check exactly what is being guaranteed. A lender may ask you to guarantee all debts owing to it by the company, under any credit arrangements past or present (an “all-monies” guarantee). Try to limit the guarantee to amounts owed under the new facility.
- Resist providing security for the guarantee (such as a mortgage over property), as it is easier for the lender to enforce directly against your assets if they are charged by way of security.
- If there are co-guarantors, consider entering into a deed of contribution. As noted above, if liability under a guarantee is expressed to be “joint and several”, each guarantor can be pursued for the full debt. A deed of contribution is a private agreement between the guarantors to each take on a specified percentage of any liability, regardless of who the lender pursues.
A lender will insist on a guarantor receiving independent legal advice before entering into the guarantee. This protects the lender from any later claim that the guarantor has not entered into the arrangement freely, without undue influence, or as a result of misrepresentation or other legal wrong. Be sure to raise any questions about the extent or effect of the guarantee with the solicitor providing the advice before you sign it.
Druces LLP’s Banking & Finance Team can assist with the negotiation of personal guarantees and can provide independent legal advice to help you understand the nature and implications of the arrangement and the risks involved.
If you require any advice on personal guarantees, please contact your usual Druces contact or: