Personal Guarantees and their Enforceability

By entering into a personal guarantee, a director of a company (as guarantor) takes on personal responsibility for repayment of the company’s liability to a particular creditor (the holder of the guarantee) in the event that the company fails to do so.  In other words, a guarantee is a secondary obligation guaranteeing the obligations of another party (usually the company) and its enforceability depends on that party having defaulted.  In contrast, an indemnity is a freestanding obligation not dependent on the other party’s default but is enforceable in its own right.  Banks will often draft guarantees to be a combined guarantee and indemnity.

In the current economic climate, lenders are placing greater reliance on personal guarantees to recover unpaid debts.  It is sometimes possible to challenge a creditor’s right to enforce a guarantee, either because of a loophole in the drafting or more likely, due to the conduct of the creditor/lender. However, challenging a personal guarantee is not straightforward and specialist legal advice is often beneficial.

When considering the enforceability of a personal guarantee, the following points should be considered:

  • Has Section 4 of the Statute of Frauds Act 1677 has been complied with?

The guarantee must be in writing and signed by the guarantor or a person authorised to do so on the guarantor’s behalf.

  • Are the terms are sufficiently clear?

Any ambiguity will be decided in favour of the guarantor.

  • Is it a specific guarantee or an all monies guarantee? Is there a cap on liability?
  • Was the guarantee executed as a deed or if not, is there identifiable consideration?
  • Was independent legal advice recommended?
  • What were the circumstances in which the guarantee was given?

A contract induced by duress or undue influence may be set aside; also, a guarantee may be avoided in circumstances where a misrepresentation has made to the guarantor.

  • Is the guarantee enforceable “on demand”? Have any demand requirements been complied with?
  • Has the underlying contract been varied? If so, are the changes material, were they communicated to the guarantor and was consent obtained?

In certain circumstances, a guarantor’s obligations will be discharged if changes are made to the underlying contract without the guarantor’s consent.

  • Does the principal debtor have a counterclaim or right of set-off which the guarantor may rely upon?

Ideally you should seek legal advice as to the nature and effect of a personal guarantee before signing any documentation as we can assist in explaining its effect and in potentially negotiating its terms, for example, to seek to make them less onerous by limiting or capping your liability.

If, however, the guarantee is already in place and you are facing the threat of enforcement action from a creditor based upon an alleged liability pursuant to it, we can assist in reviewing the terms of the guarantee to establish whether there are grounds upon which the guarantee may be rendered unenforceable and/or in negotiating settlement terms with the creditor in relation to any liability.

If you would like to know more about this subject, in the first instance, please contact John Bradshaw or Sarah Mower in our Business Services Team.

John Bradshaw is a partner and specialist in Insolvency & Business Recovery at Barker Gotelee Solicitors.

Suffolk Insolvency Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email