A personal guarantee is usually given to a lender by a director who is also a shareholder of a company as additional security for a company's borrowings.
In the past 12 months we have reviewed a significant number of personal guarantees for different lenders. The vast majority of guarantees we examine are perfectly valid and enforceable.
Standard bank guarantees are usually expressed to be for "all monies" owed by the borrower to the bank. A guarantee may also be limited in recourse to a specific amount, plus interest and any costs and expenses incurred by the bank. The amount guaranteed is also usually payable on demand.
Where a number of guarantors are providing a guarantee to a bank, the question arises whether the guarantee liability is joint, several, or joint and several.
Most standard bank guarantees are expressed to create joint and several liabilities. A bank can demand payment of the full amount from any of the guarantors and does not have to sue them all. It can therefore pick the most solvent guarantor.
Termination by Guarantor
A guarantor cannot terminate a guarantee on his/her own initiative unless he/she is prepared to pay to the bank the whole outstanding amount.
Methods of Enforcement
Calling on a guarantee begins with the service of a valid demand on the guarantor. As guarantees do not create security interests, upon non-payment it is necessary for enforcement to be sought by obtaining a court judgment against the guarantor or petitioning for the guarantor's bankruptcy. A bank may therefore benefit from acting quickly against a guarantor before other creditors do!
We have also seen a number of recent instances whereby guarantors and banks have agreed a 'settlement' in respect of a guaranteed liability. This approach may be acceptable to a bank where a guarantor can clearly demonstrate the (limited) extent of his/her net asset position and where the Bank is careful to preserve its rights against any co-guarantor(s).
Common Defences raised by Guarantors
Inevitably, during a recession, guarantors are looking at ways to avoid guarantee liabilities. In our experience, some of the defences raised (particularly in respect of non-consumer loans) are often opportunistic and based upon a misunderstanding of the law. We set out a number of complaints below and comment accordingly:
- The guarantee is void because the guarantor did not have the benefit of legal advice.
Whilst we appreciate that in cases where there is a risk that the guarantor may be subject to undue influence from the borrower or lender, the House of Lords guidance in Etridge should be followed. However, in many cases there may be no risk of undue influence and whilst (in respect of non-consumer loans) good practice suggests that building in the added layer of protection of the guarantor taking legal advice is worthwhile, if this doesn't happen it is not necessarily the case that the guarantee is invalid.
- The independent solicitor did not fully explain the consequences of signing the guarantee.
For a non-consumer loan, we do not see this as invalidating a guarantee, but as an issue solely between the guarantor and the solicitor in question.
- My resident manager told me that the guarantee would never be called in?
A guarantee can be set aside for misrepresentation by the lender to the guarantor. However in our view, the courts may be slow to make a finding of misrepresentation. In this type of case, there are many variables which require consideration before assessing the risk to the lender of the guarantee being set aside
- The guarantee should be released as the facility with the principal borrower has since changed.
Depending on the nature of the change and the wording of the guarantee itself, this can indeed present the guarantor with a credible defence.
General principles of contract law are applied to the construction of guarantees. In construing a guarantee, a court should look to give effect to the real, objectively ascertainable, intentions of the parties. Whilst there is a risk that, in cases of ambiguity and where the customer is a consumer, the court will look to apply the construction most favourable to the customer, these issues do not arise in the majority of cases. Alternatively, a robust defence is often the appropriate action for the lender to adopt, not least to remove widespread misconceptions about guarantees in the prevailing market.