Commercial Law
Personal Guarantees And Why They Can Be A Legal Minefield

Personal Guarantees And Why They Can Be A Legal Minefield

If you are a business owner or major shareholder of a business, before you agree to and sign a personal guarantee relating to that business, you should seek the advice of a lawyer from, specifically, a commercial lawyer.

At its core, a personal guarantee is basically you agreeing as an individual to pay the debts of another party, namely a business. Ultimately if that business were to fail, owing monies to other businesses, or lenders, if you had signed a written guarantee for any of them, you would be liable for those individual amounts.

At first, it might seem that there is little incentive to sign a personal guarantee, however, it is often the only way in which some businesses are able to raise the finance necessary for them to get started. The choice for a new business owner is often play safe, not have the finance, and not getting the business started, or taking a risk, agreeing to a personal guarantee, and having the money they need to start the business properly.

Ignorance Is Not Always Bliss

It is important that for a business which you own, or for which you are director, that all written contracts are thoroughly checked, not only by yourself, but by your commercial lawyer, if possible. There have been numerous examples of commercial contracts including clauses which meant, when the director signed them, they were in fact signing a personal guarantee.

Ignorance of the fact you were signing a personal guarantee may not always be enough to make that guarantee invalid, which is why you should thoroughly read everything before signing, including the small print. Look for words and phrases like ‘personal capacity’, and obviously if the word ‘guarantee’ appears anywhere, be extra cautious.

Know Which Promises You Are And Are Not Making

There are lots of scenarios when it will be in your interests to sign a personal guarantee in relation to your business, however, you must be 100% sure as to what exactly it is that you are promising. Any contract you sign that includes a personal guarantee should specify the specific commitments and obligations you are agreeing to explicitly.

It could be that as protection, you request certain limitations to be included, and if so, make certain that they are clearly stated. For example, you may have certain assets which you wish to keep safe, such as investments, or a home, that you do not wish the other party to the agreement to be able to pursue in order to settle their claim.

Ask For Time Limits

The idea that they might have a personal guarantee hanging over them forever, might not make everyone feel comfortable. If that includes you, then know that there are some ways in which you can ensure you not liable until the day you die.

Placing a limit on the proportion of the liability, or the actual amount of the debt that you are the guarantor for can ensure that you are always aware of what is owed and that it is not going to keep increasing. You can also request that a limit is placed upon the length of time that you are acting as a guarantor.

Finally, you can request that your obligations as a guarantor only exist for as long as you are a director of the company. This way if you ever resign, or are removed as a director, your personal guarantee is no more.