Introduction

Being asked to sign a personal guarantee can feel like a routine step in obtaining business finance, but it is one of the most serious documents a director, shareholder or business owner may be asked to sign. A personal guarantee can mean that if the company cannot meet its obligations, the lender, landlord or creditor may look to you personally for payment.

This is why many banks, lenders and commercial parties require directors to take independent legal advice before signing. The purpose is not simply to witness a signature. The purpose is to make sure you understand the nature of the guarantee, the personal risk involved and the possible consequences if the business defaults.

What is a personal guarantee?

A personal guarantee is a legally binding promise by an individual to answer for another party’s debt or obligation. In a business context, this often means a director guaranteeing the liabilities of a limited company. The company may be the borrower or tenant, but the guarantee creates a direct personal risk for the guarantor.

Personal guarantees are commonly used in business loans, overdrafts, invoice finance, asset finance, supplier credit arrangements and commercial leases. They are often requested where the company is new, has limited assets, has a shorter trading history or where the lender wants additional security.

Why directors should be careful before signing

The main point to understand is that the guarantee may remove the protection directors often associate with running a limited company. If the company becomes insolvent or cannot repay the relevant debt, the creditor may be able to pursue the guarantor personally, subject to the wording of the guarantee and any applicable defences.

The wording matters. Some guarantees are capped at a fixed amount. Others may be unlimited. Some include interest, legal costs, enforcement costs and continuing obligations. Some are linked to a specific facility, while others may cover wider current and future liabilities. A director should not assume the document only relates to the headline loan amount.

What should you check before signing?

Before signing, directors should check who is being guaranteed, what debt or obligation is covered, whether the guarantee is capped, whether it is joint and several with other guarantors, whether interest and costs are included, whether the guarantee continues after the facility changes, and how it can be released.

You should also consider whether the guarantee is supported by security over your home or other assets, whether your spouse or partner needs separate advice, and whether the lender requires a solicitor’s certificate confirming that independent legal advice has been provided.

Can a personal guarantee be challenged?

A personal guarantee may be challenged in some circumstances, but this is highly fact-specific. Potential issues can include unclear wording, undue influence, misrepresentation, lack of understanding, procedural irregularities or arguments about whether the debt falls within the scope of the guarantee.

However, once independent legal advice has been given and the guarantee has been signed, it can become much harder to argue later that the consequences were not understood. This is why the advice appointment should be treated seriously and not as a box-ticking exercise.

How Adkirk Law can help

Adkirk Law can advise directors, shareholders and individuals who have been asked to sign a personal guarantee. We can explain the document in clear language, highlight the legal and practical risks, and confirm what you are agreeing to before you sign.

We can also advise where a personal guarantee has already been signed and a lender, landlord or creditor is threatening enforcement. Early advice can help you understand your position, your options and any practical steps that may reduce risk.

Conclusion

A personal guarantee should never be treated as a routine signature. It can create a direct personal liability, even where the underlying debt belongs to a limited company. Before signing, take time to understand the wording, the financial exposure and the circumstances in which the guarantee could be called upon.

If you have been asked to sign a personal guarantee, Adkirk Law can provide clear independent legal advice so you can make an informed decision before committing yourself personally.

Need help?

Need advice before signing a personal guarantee? Contact Adkirk Law for clear independent legal advice before you commit yourself personally.

This article is for general information only and does not constitute legal advice. If you are dealing with a regulatory, fraud, tax or professional discipline matter, you should take advice based on your specific circumstances.

Related topics

• Independent Legal Advice (ILA) in Preston: https://adkirklaw.co.uk/independent-legal-advice-ila-in-preston-what-it-is-and-when-you-need-it/ 

• Do You Need Independent Legal Advice for a Mortgage in Preston?: https://adkirklaw.co.uk/do-you-need-independent-legal-advice-for-a-mortgage-in-preston/ 

• Regulatory Law Solicitors: https://adkirklaw.co.uk/regulatory-law/ 

• Contact Adkirk Law: https://adkirklaw.co.uk/contact/