Personal Guarantees

personal_guarantee

As the Irish economy continues to endure troubled times, more and more people are unfortunately becoming painfully aware of the consequences of guaranteeing the debts of their business or of a business associate.
Guarantees can be limited in amount and/or duration. Potential guarantors should always be absolutely clear in the understanding of these particular points before signing a guarantee, and should also know precisely whose obligations are being guaranteed.
Banks often seek personal guarantees as an added form of security when extending credit facilities, be it through overdraft or term loans. Landlords will often require similar personal guarantees in lieu of a rental deposit. The advantage in personal guarantees as security for a company’s debts is that they entirely bypass the separate legal personality of a company and allow the creditor to recover from a third party (often the directors or shareholders) who are often a better mark in a situation where a company is facing insolvency. In addition it allows a lender to tap into the creditworthiness and assets of a party who is not a signatory to the underlying contract (be it a credit facility agreement, charge or a lease).
The Courts have evolved a significant body of case law which provides numerous rights to guarantors. These include:
1. A right of indemnity from the borrower in the event that the guarantor pays all or part of the debt;
2. A right of subrogation in the event that the guarantor discharges the entire debt, so that the guarantor effectively steps into the shoes of the lender;
3. A right to be released from the guarantee in the event that other co-guarantors are released or have the terms of their specific guarantees varied by the lender.
As banks in particular have become experienced in the range of defences which have historically been available to guarantors when a guarantee is called upon, the standard forms of personal guarantee issued by banks have developed to protect the bank’s interests. Personal guarantees will now often expressly exclude rights which were historically afforded to guarantors by the Courts. As guarantees are almost always issued by the party seeking to rely on them, any vague wording will, as a matter of legal principle, be construed by a Court in favour of the guarantor.
Therefore, if a guarantee is called in, it may be worth having your solicitor inspect the guarantee document and the underlying loan or lease (as well as the surrounding circumstances) as there are a number of ways by which even the best drafted guarantees can be defended or liability thereunder reduced. For example, in the event that a personal guarantee has been signed by more than one party, and the creditor seeks to rely on that guarantee against only one of the guarantors, that guarantor can (if legal proceedings issue against him) seek to join the co-guarantors as co-defendants in order to force them to contribute. Even if recovery is not viable against those co-guarantors, tactically it can be of use in reducing the value of the creditor’s claim and increasing the chance of an acceptable settlement.
If you are interested in obtaining legal advice on this subject, please do not hesitate to contact one of our team.