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What every spouse or partner needs to know about personal guarantees

Posted by Todd Davison on Oct 25, 2018 6:35:49 PM

You co-signed a personal guarantee for your spouses business loan and now you’re faced with losing everything you own and bankruptcy.  How did you get to this point and was there any way you could have prevented it from happening?

With around half of UK start-ups failing within five years, personal guarantees may mitigate the lender’s risk, but they represent a huge risk across the SME community.  

Recent research showed 55% of SME owners were unable to describe a personal guarantee and more than 60% were unaware their personal assets are at stake.  Understanding these risks is not only a must for the business owner, but also for the spouse or partner who may have co-signed the guarantee.

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So what is a personal guarantee and what can you do to mitigate the personal risk to you as a co-signatory without direct involvement in the business?

A personal guarantee gives the lender an unsecured written promise made by a director or number of directors to accept liability for a company’s debt.  You may also have to sign the guarantee if you co-own the family home.  In practice, this means that if your partner’s business defaults on a loan (or lease) your personal assets (including your home), credit ratings and future access to finance may be at risk too.  The impact on family relationships can be devastating.

This is why it’s vital you understand what you’re potentially getting into and seek sound legal advice before making such an important commitment.  Even if your partner’s business is thriving today, things can go wrong in the future, often through no fault of the business owner. 

If you’ve signed a guarantee without full knowledge of the ramifications, things can get very complicated if matters reach the courts, as the Cooper versus Bank of Scotland inter-spouse guarantee case illustrates.

So what can you do to mitigate the risks for you and your partner?

  1. Educate yourself about personal guarantees and the risks and discuss these with your partner, financial adviser and lawyer before signing any documents.

  2. Ask your partner:

    1. Is a personal guarantee the only way to get the loan?

    2. Is the liability split between all the directors?

    3. Where do your partner’s responsibilities for the guarantee begin and end? Personal guarantees can come in many guises, so you need to be aware of what yours entails.

    4. Whether they’ve negotiated a cap on the guarantee and negotiated the best possible terms.

    5. Are they likely to have to sign other personal guarantees in the future, which may increase the risk for them and you?

    6. If business prospects do deteriorate, will the lender enforce its security over the company’s assets before enforcing the guarantee?

  3. Make sure your partner confirms all the negotiated terms of the guarantee in writing and that all key facts are disclosed at the time of signing the guarantee.

  4. Impress the importance of honesty upon your partner. They may think they‘re protecting you by telling you the partial truth about a document they want you to sign, but this can lead to significant complications and added stress in the future.

  5. If signing a personal guarantee is the only way your partner can secure finance, look into the possibility of taking out personal guarantee insurance which can provide cover for up to 80 per cent of the debt, as well as give you access to specialist advice to keep the business on track. 

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If things do go wrong for the business, despite your partner’s best efforts and whether or not you’ve taken out personal guarantee insurance, you can encourage your partner to take the following steps to soften the blow should the guarantee be called in:

  1. 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.

  2. If all key facts were not disclosed at the time of signing the guarantee, there may be scope to negotiate out of it.

  3. If you believe you or your partner were subject to undue influence in signing the guarantee you have the right to request an examination of the circumstances surrounding signature.

  4. Urge your partner to be transparent with the lender at the first signs of, and throughout, any periods of trouble and to negotiate a manageable deal for debt payment.

  5. Flag up any concerns you may have that there has been any wrongdoing by your partner or the lender in relation to signing the guarantee.

When it comes to directors’ personal guarantees, ignorance is definitely not bliss for a co-signing spouse or partner, so be prepared by being forearmed.

For more information call us on 0208 004 7250.

Topics: #personalguarantee, #Directors, #SMEs

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