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Is a Personal Guarantee Enforceable?

Posted by Todd Davison on May 21, 2020 11:48:04 AM

It is possible that the personal guarantee you signed is no longer enforceable. Find out your options for challenging personal guarantees to avoid the threat to your personal assets.

If you’ve signed a personal guarantee and your business becomes unable to repay a debt to the lender, you’re personally responsible. 

In other words, if your growth plans don’t quite come off and a claim is made under the guarantee, you (and any other guarantors) will be liable to pay the company’s debt, and your personal assets will potentially be on the line.

However, if it comes to the point whereby the lender is seeking to enforce the personal guarantee, you should seek legal advice first as you may have grounds to challenge its validity.

There might be a chance that the lender is left with an unenforceable personal guarantee and you can retain your personal assets rather than be forced to hand them over to cover the debt.

In this blog, we’ll outline some of the circumstances which might make a personal guarantee unenforceable. But it’s important to stress that seeking to rely upon unenforceability is foolhardy. Whilst there may be some opportunity to do so, it would be likely to require the funding of legal costs which, at a point the business is likely to have failed, is probably unlikely.

  1. How long is a personal guarantee enforceable?

The first thing to look at is the date on which you signed the personal guarantee. If the ‘limitation period’ – the maximum period of time allowed by the law to commence legal proceedings for breach of the contract of guarantee – has expired, you might have a means of defence for it no longer being enforceable.

Generally speaking, for normal contracts, the limitation period is six years from the date that the breach of contract took place. For deeds, it is 12 years from the date of the breach.

If a lender exceeds this length of time before making their claim, you may be able to argue your case in court that you are no longer liable for the debt.

However, it is unlikely that the creditor will allow this time to elapse, and the personal guarantee will usually be called in upon breach of the contract.

  1. What else can make a personal guarantee unenforceable?

The other common defence used by debtors is centred around the contract. So, you should check whether any changes have been made to the guarantee without your knowledge. If they have and they’re prejudicial to you, the document may be unenforceable.

If all key facts were not disclosed at the time of signing the personal guarantee, there may be scope to negotiate out of it. For example, you believed someone else was a co-guarantor, but they weren’t and you weren’t aware of this fact. 

If you believe you were subject to undue influence in signing the guarantee or signed it under duress, you have the right to request an examination of the circumstances surrounding the signature. Maybe the lender failed in their duty to inform you that you should seek independent legal advice before signing?

Or perhaps the facilities provided by the bank changed significantly in the time between signing the guarantee and the creditor’s claim, and you didn’t know about these changes. Again, these types of changes could help in your case. 

A specialist in contract law is the best person to speak to see if you have a valid challenge should a personal guarantee be called in.

  1. Take out personal guarantee insurance

Your best option for dealing with a personal guarantee, should it be enforced in line with the law, is to have preemptively taken out personal guarantee insurance when securing finance or a loan for your company.

With personal guarantee insurance, you can cover up 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business. For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists today on 0208 004 7252.

Topics: #pgi, #personalguarantee, #personalguaranteeinsurance, #commercial finance, #bankruptcy

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