It is becoming increasingly common for company directors, partners or sole traders to be asked to provide personal guarantees, in particular as a pre-condition to banks providing new bank facilities or agreeing to amendments to existing facilities.
The primary concern for guarantors will normally be: how much is it for? Typically, guarantees are either unlimited, capped at a specific figure, or restricted to sums due under a specific agreement. It is rare for a personal guarantee in favour of a bank to be unlimited (this would normally be a breach of the Banking Code). Where the guarantee includes a fixed cap, be aware that additional sums may still be payable over and above that cap (e.g. interest from the date of demand and enforcement costs). Where a guarantee is pegged to a specific agreement, the sums due under that agreement may change increasing the guarantor's exposure.
In addition, a guarantor may be asked to grant security over their home or other property, to back up the guarantee. Your home may be at risk if the guarantee is called. Care also needs to be taken here to ensure that the guarantor can actually grant such a security where the property concerned is already secured to another lender. Will a further security restrict the guarantor's ability to remortgage?
Guarantors should also make sure that they know when the guarantee will drop dead. Does it have a fixed expiry date or can the guarantor terminate it by giving a set period of notice? The guarantor may however still be on the hook for claims made prior to the "drop dead" date, in either scenario. Also, when considering termination by notice, note that the bank may respond by withdrawing or re-pricing the bank facilities.
Likewise, watch out for banks looking for the ability to apply deposit balances towards paying off amounts owing under the guarantee. Consider holding deposit balances with a different bank.
Banks invariably require personal guarantors to take independent legal advice on the terms of the guarantee (to ensure that the guarantor cannot argue that he or she was not aware of the effect of the guarantee). This legal advice should serve to reassure the guarantor regarding the scope of his or her exposure under the guarantee.
Jennifer Allan is a solicitor specialising in banking with leading UK law firm Shepherd and Wedderburn LLP.