In the current financial climate personal guarantees are commonplace. Lenders will often look for additional security in respect of advances made to companies as part of an overall security package. This often comes in the form of personal guarantees given by the company’s directors (and sometimes shareholders), the effect of which is that the individuals giving guarantees are personally liable if the business is unable to repay its financial obligations under a lending facility.
It is imperative that you understand what you are being asked to sign and what the consequences of a guarantee may be. We can provide you with this advice at the outset as it is always better to obtain this before you sign. There are many lenders who will insist that such advice is taken at the outset or that you specifically confirm you have been given the opportunity to take that advice and have refused to do so. Other lenders or trade creditors may not be so transparent, and you need to ensure you are aware of any guarantee contained within trade creditor agreement and that you understand the implications of these.
A creditor lender will rely on a guarantee in the event the company does not pay. You need to understand the circumstances in which it can be relied on, what amounts can be demanded from you and what avenues that creditor has to enforce the terms of any guarantee.
The issue of personal guarantees provided to landlords is particularly relevant as there are restrictions in place on landlords, due to COVID, as to what remedies they can exercise against commercial tenants for unpaid rent. However, there will be no such obstacles for a landlord relying upon a guarantee if a tenant has not paid rent due. This is despite the fact the landlord may be precluded from taking certain remedies against the tenant directly.
Personal guarantees can become a source of real worry if a company’s financial position is weak, debts are piling up and cash flow is dubious. If you have signed a personal guarantee and are concerned about its terms or you are being pursued by a lender, we can help in advising on your position and the potential consequences.