A personal guarantee is an agreement that makes one or more people liable for another person’s debts. Common examples include:
– parents providing guarantees for their children;
– a husband/wife providing a guarantee for their spouse; or
– a director providing a personal guarantee for a company.
For instance, banks generally require a personal guarantee from the borrower or another person which can be called upon if the borrower defaults on making repayments under the loan agreement. The borrower as well as the guarantor may be both jointly and severally liable for the repayments. This means that the bank can pursue the guarantor for the debt owed to them (by the borrower) without pursuing the borrower first.
You should consider appropriate asset protection measures before entering into a personal guarantee. If you fail to do so and leave your assets unprotected from creditors, a personal guarantee may undo all of the good work you have done.
A typical example is a sole director/shareholder company wants to extend their finance for a business. The spouse of the director holds the family home in their sole name to avoid creditors of the business forcing the sale of the home to satisfy any unpaid debts of the company. The bank requires the director and director’s spouse to provide a personal guarantee for the performance of the company. If the director’s spouse provides the guarantee, then the family home is at risk of being sold by the bank despite the effort to keep the asset separate from the business.
If you require further explanation, please do not hesitate to contact one of our experienced Commercial lawyers.