Personal guarantees are particularly common where a company has limited trading history, insufficient assets, or where the lender requires additional comfort beyond the company’s covenant strength.
Each personal guarantee is different, and the level of risk will depend on the specific drafting and whether any security is also being provided.
What is a personal guarantee?
A personal guarantee is a legally binding promise by an individual, typically a director or shareholder, to be personally responsible for a company’s liabilities if the company fails to meet its obligations.
In practical terms:
- If the company defaults, the creditor can pursue you personally for repayment
- Liability is often uncapped, unless expressly limited
- The guarantee may be supported by security, such as a charge over personal assets (commonly property)
For many SMEs, personal guarantees are a standard requirement, particularly in:
- Bank lending and overdrafts
- Asset finance and invoice finance arrangements
- Property investment and development finance
When can a personal guarantee be enforced?
A lender will typically look to enforce a personal guarantee where the company has defaulted, particularly if the company is insolvent or recovery from the company is unlikely to be sufficient.
Many guarantees are drafted so that liability arises “on demand”, meaning the creditor may not need to exhaust remedies against the company before pursuing the guarantor.
Key risks and issues to consider
Scope of the guarantee
Not all guarantees are limited to a single transaction. Many are drafted widely as “all monies” guarantees, covering:
- present and future liabilities;
- multiple facilities with the same lender; and/or
- variations or extensions of underlying agreements.
Key questions to consider:
- Is the guarantee limited to a specific facility?
- Does it extend to future borrowing without further consent?
Financial cap (or lack of one)
Some guarantees include a financial cap, but many do not.
Key questions to consider:
- Is there a clear maximum liability?
- Does the cap include interest, costs and enforcement expenses?
Without a cap, your exposure may significantly exceed the original borrowing.
Joint and several liability
Where more than one individual gives a guarantee, liability is usually joint and several. This means:
- A creditor can pursue any one guarantor for the full amount.
- The paying guarantor must then seek a contribution from others.
This can create significant individual exposure, particularly if other guarantors are unable to contribute.
Security over personal assets
A guarantee can be supported by security, such as a legal charge over a family home or other personal assets.
Points to check:
- Is the guarantee unsecured or backed by security?
- What assets are included?
- Are there restrictions on dealing with those assets?
Where security is granted, the creditor may be able to enforce directly against those assets, including seeking possession and sale.
Continuing nature of the guarantee
Many guarantees are drafted as continuing security, meaning they remain in place even if:
- the underlying agreement is amended;
- additional facilities are provided; and/or
- the company’s ownership or structure changes.
Unless formally released, the guarantee may continue indefinitely.
Limited rights of defence
Guarantees commonly include provisions under which the guarantor:
- waives certain rights of challenge;
- agrees to pay on demand; and
- cannot rely on disputes between the company and the creditor.
This can make enforcement relatively straightforward for the lender.
Practical steps before agreeing to a personal guarantee
Before entering into a personal guarantee, you should:
- Carefully review the full extent of your potential liability, including future exposure
- Seek a financial cap where possible
- Understand whether security over personal assets is required
- Consider your exposure in light of co-guarantors’ financial positions
- Check whether the guarantee is limited or drafted on an “all monies” basis
- Consider whether liability should reduce over time as borrowings are repaid
- Take independent legal advice, typically required by lenders in any event
Personal guarantees should be considered in the context of your wider personal financial position, not just the company’s immediate funding needs.
Leaving the business: don’t overlook the guarantee
A commonly overlooked risk is that a personal guarantee does not automatically fall away if you:
- resign as a director
- sell your shares
- step back from the business
Unless the creditor formally releases you, you may remain liable for:
- existing liabilities
- future borrowings (depending on the drafting)
What should you do on exit?
If you are leaving a business, you should:
- Identify all personal guarantees you have given
- Request a formal release from the creditor
- Ensure the release is:
- in writing
- signed by the creditor
- clearly covers all liabilities (or defines any residual exposure)
In transactions such as share sales, obtaining a release from personal guarantees should be treated as a key negotiation pointat an early stage. In practice, lenders may require replacement guarantees, additional security or partial repayment before agreeing to a release.
Key takeaways
- A personal guarantee creates direct personal liability for company debts
- Liability is often uncapped and may extend to future borrowing
- Guarantees may be supported by security over personal assets, including your home
- They do not automatically terminate when you leave the business
- Early legal advice and negotiation can reduce your exposure
How Moore Barlow can help
Our Corporate solicitors advise directors, shareholders and business owners on all aspects of personal guarantees, including:
- Reviewing and explaining guarantees in clear, practical terms
- Negotiating caps, limitations and release provisions
- Advising on risk before signing
- Securing releases on exit or restructuring
- Ensuring consistency with wider transaction documents (including share purchase agreements and finance arrangements)
If you are being asked to sign a personal guarantee, or are planning to exit a business, taking advice at an early stage can make a significant difference to your personal risk.
