Personal Guarantees - What to look out for

From time to time people in businesses are asked to sign Personal Guarantees in support of the obligations of their companies - most commonly to their Bank. Although there is often little scope for negotiation any party who is signing a Personal Guarantee should take advice so that they are least have a clear idea of their obligations. The following are areas which commonly come up:-

1. The Guarantee document will sometimes try and make the Guarantor "jointly and severally" liable with the company. This means that a creditor can enforce the Guarantee without first making a demand for payment of the company. Ideally the Guarantor should try and ensure that the creditor is required to demand payment from the company before looking to the Guarantor for payment.

2. A financial cap or limitation of period of the Guarantee should always be asked for. In addition it may be possible to negotiate for the removal of the Guarantee once the company reaches an agreed level of profitability.

3. Sometimes the Guarantee obligation also includes an "indemnity". This usually involves the Guarantor being liable not only for the principal amount under the Guarantee but also the creditors losses and costs which may be incurred if the company fails to pay. The agreement to an indemnity provision could have the effect of removing any limitation on the Guarantee which might otherwise appear to have been secured.

4. It should not be assumed that if a business relationship ceases that a Guarantee also finishes. It is essential that any Director leaving a company makes sure that he is not leaving any Personal Guarantees in place. Any negotiating position by a departing Director to try and secure this could well be lost after the time of departure.

Should you be interested in obtaining any further information in relation to this topic please contact Morinne Macdonald or David Beveridge who will be happy to assist.