Personal Guarantees: What are they and can they be enforced?

A personal guarantee, also known as a director’s guarantee, is an agreement between a limited company director and a lender, stating that the individual who signs is responsible for paying back a loan should the business ever be unable to make payments.

In providing a personal guarantee the director is providing the lender with a further layer of security means that if the business becomes unable to repay the debt and shows the lender that the director believes in their business.

Where there is more than one personal guarantee, this is known as a joint and several personal guarantee. In these circumstances there would be a group of directors, not just the individual director, who would be responsible for paying off any outstanding liability. Where one director doesn’t pay, the remaining guarantors would pay off the full amount.

There are a number of circumstances when a personal guarantee would be used, for example Property mortgages and leases, Business loans, Asset lease Agreements and Invoice Finance Arrangements.

Personal guarantees are enforceable if the contract has been completed properly. They are unbreakable, and this applies in an insolvency. As soon as the business declares it is unable to repay, the lender can request that the outstanding balance is fulfilled. If the lender requests it, you will have to settle the debt and come to an agreement to pay it.

What a personal guarantee includes is determined by the relevant contractual documentation and the surrounding circumstances at the time the contract was made. Defining what a personal guarantee includes can be complicated and requires careful reading of all relevant documents. The interpretation may depend upon all the surrounding circumstances and even the conduct of the parties after the guarantee has been given.

The law imposes several formal requirements that must be met if a Personal Guarantee is to be enforced against the Guarantor. They include:

• The form of the personal guarantee:The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee (or some memorandum or note of the guarantee) must be in writing and signed by the Guarantor or a person authorised by the Guarantor. The writing may be a formal contract or agreement, or it can be given by simple means such as an email or memorandum.
• It must be signed: The Guarantor should sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature. The High Court in Golden Ocean Group Ltd v Salgaocar Mining Industries [2011] EWHC 56decided that ‘signature’ should be given a wide interpretation.
• A creditor will not be able to rely on a verbal assurance that the director will guarantee their company’s liabilities.
• A guarantee is a contract in its own right, over and above the contract for which it is being given, and it must therefore comply with the basic requirements of a contract – including the need that there be “consideration” for the promise.

Legal Requirements for a Guarantee

Many documents are called guarantees when they’re not. The factors that courts take into account are:

1. Proper interpretation: contracts of guarantee are interpreted “as a whole”. It is the particular words used in the relevant clauses that count. Not what it’s called
2. Title of document: the title of the document is not decisive
3. Substance over form: Just because the word “guarantee” is used in the contract somewhere, does not make it a guarantee

Guarantees have a number of formal requirements to be a guarantee to put it beyond doubt that it is a guarantee.

• Form of guarantees:It must be evidenced in writing. The writing is may be formal contract or agreement, note, memorandum or promissory note
• Signed:The guarantor should sign it, or have their authorised agent sign it. The name may be written or printed, so long as it is intended to operate as a signature
• Secondary Liability:Establish that the guarantor has secondary liability to perform the guaranteed obligation. The principal debtor has the primary liability to perform the contract
• Consideration:The document should satisfy the requirements of any other contract.
  That means, offer and acceptance, consideration, an intention to be legally bound and capacity to make the contract

Some guarantees will have loopholes, others won’t. But it’s not just the terms of the guarantee that decide these things. The creditor may behave themselves in a way that prevents them from relying on the guarantee.

Some of the more common ways guarantors get out of a personal guarantee include:

• The guarantee was undermined by civil fraud, negligent misrepresentationor undue influence, because the guarantor was substantially misled before it was signed
• The creditor repudiated the contract of guarantee, and the guarantor accepts the repudiation
• The creditor has failed to tell the guarantor something that affects the relationship between the debtor and creditor
• A variation is made between creditor and debtor in a way which the guarantor would not have expected. Possibilities include:
• extension on the time to pay
• increase in the sum of the debt of the debtor
• A condition precedentto the guarantee was agreed and never satisfied.

Is a guarantee given over email valid?

Provided that the other requirements for creating a contract are met, a guarantee can be validly created over (or evidenced by) email, as email is capable of fulfilling the requirement that a guarantee be in, or be evidenced by, writing and signed. As an alternative, where the parties wish to execute a formal contract or deed of guarantee, but one or more of them is not able to attend a physical signing, they should consider a ‘virtual’ signing’.

If you are considering whether a personal guarantee is an option for you or you already have one in place and would like it to be reviewed or are being pursued by creditors we can review the enforceability of the guarantee for you.