Personal Guarantees: Everything You Need To Know
This post focuses on PERSONAL GUARANTEES. It’s a long post, but if anybody has personal guarantee exposure, I would suggest it is a must-read.
I am looking to impart some of our knowledge and experiences in this niche.
These article takes the form of a bank of FAQs, genuinely asked by our clients, and matters we have to take on daily in our work. Such as clients in denial or looking for ‘easy outs’ from their commitments regarding the original Personal Guarantee.
They often Google what they hope will answer what they want to hear, which in turn becomes their solution and attack…. WRONG & WRONG! It’s the same if you ever Google a medical condition.
So typically, we hear the following, and to each, we have added a commentary which is realistic and practical:
? THEY SAID THEY WOULD NEVER CHASE ME/ENFORCE MY PERSONAL GUARANTEE
The requirement for a personal guarantee is often glossed over at the start of a financial agreement. We find this is particularly the case involving asset finance when for all intents and purposes, the client’s contact with the credit provider is a commission-driven salesman.
This has undoubtedly extended into the Peer-to-Peer lending market, where these platforms are brokers.
As the process and paperwork then unravel, in respect of the sale and credit provision, the subject of the personal guarantee is trivialised and comments such as:
At the point of any credit provision, including most importantly those involving personal guarantees, both parties are in a ‘honeymoon period’ in that the credit provider and/or the asset provider are looking to write new profitable business and the client typically is enamoured with the credit facility and assets involved.
This ‘honeymoon period’ then clouds the mindset of the client, who gets on with it anyway - but hangs on to the throw-away ‘promise’ made in that they would not pursue a personal guarantee, etc.
As and when things go wrong, very often, the salesman/team involved in selling the asset/finance and seeking the personal guarantee are no longer there, and quite frankly, clients sound ridiculous when they come up with these excuses/comments such as ‘I didn’t think they would pursue me – that’s what they said!?’… but comment they do and bless them – they believe all is OK!
We fully understand that nobody likes bad news, especially if their business had been successful to this point, but being honest and realistic about a situation is vital and then attacking it from there.
However, relying on such weak claims does nothing but undermine their overall negotiating position.
They will be viewed by a pursuing creditor and their legal team as being uncommercial (polite phrase!), playing into the hands of those seeking to further profit from the client’s unfortunate position.
? I WAS FORCED TO SIGN MY PERSONAL GUARANTEE
Come on now!
Many clients feel as though they were coerced into continuing with a credit facility and the requirement of a supporting personal guarantee, or it was a demand at the start of any credit facility supported by a personal guarantee.
Some take it as if they were given a stark choice: if you don't provide a signed personal guarantee, you will not keep/get the finance, but that is a purely commercial decision for the borrower to make.
Again, claiming they were ‘forced’ to sign a personal guarantee is, in our opinion, a weak emotional response that again will play into the hands of any chasing creditor and their legal teams.
The creditor involved may well have increased the pressure for the need for a personal guarantee, especially if the business is struggling. As a lender, they need to ensure they have secure cover in a riskier situation.
When a client claims they were forced to sign a personal guarantee, we question that comment and then look behind this claim to look for technical issues instead of the said emotional weak responses.
No one can be physically forced into signing a personal guarantee - it is just a choice, be it a pressured choice.
This is probably harsh in delivery, but we regularly come up against clients who think they've been wronged regarding personal guarantees. They had the benefit afforded by the funds etc., but struggle to face the reality of the consequences of a struggling business.
The primary measure is that if you and your business benefit from a credit facility, you provided a personal guarantee as security supporting this facility. Any Court in the land would find in the creditor’s favour, and the argument of being forced to sign the personal guarantee would be laughed out of Court!
Tough but true.
? THEY MADE MY PARTNER SIGN THE PERSONAL GUARANTEE
As we all know, personal guarantees exist to allow providers of credit to be able to go behind the corporate veil and bring personal exposure into play - for what is a limited company liability.
Personal guarantees are usually only ever taken if a client is deemed to be asset rich. If the home is the primary asset, then a quick way to tie that up is to require the partner to sign a personal guarantee.
To my mind, this is a step too far, and indeed, there is a Statute and Case Law that supports and affords some protection in such scenarios.
That said, many credit providers seek a personal guarantee from the other party over and above the director’s requirement to essentially free the primary asset if things go wrong.
领英推荐
In such cases, obviously, the director of the company is exposed in terms of the personal guarantee, but we would fight for any wife/partner who has been coerced into signing something which ultimately puts their home at risk and for which they get little or no benefit.
Above there was a brief reference to case law, and the Etridge case sees the need for additional provisions for a guaranteed requirement by a partner not directly involved in the business. It is essential that the provisions referred to are adhered to and correct independent advice is taken.
The difficulty is that if the partner provided personal guarantees, possession is 9/10 of the law, and it is a difficult fight to release a partner share from a joint and several guarantees in this instance.
We, however, at Bell and Company undertake many such fights for parties being coerced into such positions.
? IN DENIAL ABOUT YOUR PERSONAL GUARANTEE
Any business failure that culminates in a call on a personal guarantee is obviously a huge blow to any business owner. Everyone reacts differently to such a failure, from the range of ‘not giving a monkey's’ to a full personal breakdown.
Our team is trained to be hugely empathetic to prospective clients' approaches, but the worst scenario we face from any enquiring client is that of DENIAL.
Typically, these clients seek any number of reasons why they think (backed up by any random fact on Google!) they should be exempted from their personal guarantee, all of them irrelevant and which usually worsen their position.
The key to any bad financial situation is realism and the ability to attack the issue. Whinging along the lines of ‘why me’ and playing the blame game is in no way healthy.
I commented above that this attitude could see their position to worsen, and this often sees:
My approach here may appear to be harsh, but it's realistic, and if we cannot get potential clients to see the failings caused by their default position of denial, then it’s a struggle, and we see any number of prospects go off and look to take on the creditor – fail and return with a worsened situation.
If you have clients in this state of denial, try to knock them out of it. It may not be what they want to hear, but it is ultimately for their own good.
? WILL I LOSE MY HOME? – PERSONAL GUARANTEE CALLED ON
Stating the obvious, but if the home is the principal asset supporting any asset and liability submission made, there is a good chance that a creditor will look to pursue it as they effectively have security over the home.
The chances of putting your home at risk in a personal guarantee scenario multiply if there is little or no dialogue with any claimant who holds a personal guarantee.
Like the in-denial comments above, no engagement gives the claimant creditor and/or their legal team an advantage.
At any one point, we at Bell and Company are acting for 80+ clients seeking to protect the house against personal guarantee claims.
We do this by bringing commerciality - the client will undoubtedly have to, at some point, pay something with respect to the personal guarantee granted. Our task is to minimise the exposure and any subsequent payment to settle any claim.
Creditors have a number of routes to attack legally to enforce their Personal Guarantee security.
This often takes the form of a County Court Summons, looking to secure a Judgement. From there, they can then secure the position by way of an Order Charging Land. With this increased security, it is much harder to negotiate a settlement, which is why full engagement is required from the outset.
The other ‘popular’ approach for creditors to seek to enforce their personal guarantee is to issue a Statutory Demand, the precursor to bankruptcy proceedings.
This is usually a quicker route and brings immense pressure to bear, but on the flip side, it is a riskier route as in the event of Bankruptcy, the property will be realised for all creditors and subject to usually heft trustee costs.
As we said at Bell & Company, our approach is to bring massive commerciality to what is usually an incredibly pressurised situation….. as it should be when the family home is at risk.
In summary, full engagement is required but in the right way, as this will ensure those fearing the loss of their home have the best chance of saving it.
? PERSONAL GUARANTEE DEMAND – WHAT NEXT – WHAT CAN THEY DO?
So personal business values and the personal guarantee are called upon. This takes the form of a formal demand to repay any balanced accredited deems to be payable. If a personal guarantee is in place, then there is no point contesting them I knew she I of any personal guarantee claim as, again, this undermines the situation the client faces.
Very often, clients knee jerk when they receive demand for their personal guarantee, and it is vital that due thought process is applied when entering into any dialogue with an accreditor. Very often, clients talk on an open basis when indeed it should be on a without prejudice basis.
DM me if you or anybody else needs to talk this through.
Website: www.bellcomp.co.uk
Email: [email protected]