A “must have” for all (Specialist) Lenders

When a borrower defaults on a loan, lenders often discover that a personal guarantee is one of the most valuable documents in their arsenal – if they sought one at the inception of the loan.  

A properly drafted and executed personal guarantee provides an additional route to recovery, allowing the lender to pursue the guarantor personally for sums owed by the borrower.

A personal guarantee is a legally binding contract (unless executed as a deed – see next paragraph)), and normal contract rules apply (i.e. there must be an offer, acceptance, consideration, and the intention to create a legal relationship). While a guarantor may not provide direct consideration, it is normally established by way of advancing credit to the borrower.

However, most lenders require guarantees to accompany all loans, and for that guarantee to be executed as a deed (to avoid arguments over consideration altogether), as it has advantages.

A deed has an extended limitation for enforcement of 12 years (s.5 of the Limitation Act 1980), whereas a guarantee in contract form has a limitation of 6 years (s.8 of the Limitation Act 1980).

Put simply, by executing a personal guarantee as a deed, the lender has more time to bring a claim against the guarantor (ergo, executing as a deed provides the lender with greater protection).

A common misconception amongst guarantors is that a lender must first exhaust its remedies against the borrower before pursuing them personally (pursuant to the deed). Such a contention will depend on the wording of the guarantee, but lenders should look to ensure the wording of the guarantee does not prevent immediate action against the guarantor as soon as the borrower defaults:

“…the Lender shall not be obliged, before taking steps to enforce any of its rights and remedies under this guarantee, to:

  1. take any action or obtain judgment in any court against the Borrower or any other person;
  2. make or file any claim in a bankruptcy, liquidation, administration or insolvency of the Borrower or any other person; or
  3. make demand or enforce or seek to enforce any claim, right or remedy against the Borrower or any other person.”

By way of an example, a property development company borrows £1,000,000.00 to fund a residential development/conversion project. The lender seeks a personal guarantee from the director of that company (or another).

Unfortunately, things do not go to plan: the market drops, a war breaks out, an unanticipated virus takes hold, global inflation takes effect, and the refinancing never materialises, and the loan falls into default.

Suddenly, a document that was signed in less time than it takes to order a coffee becomes the most important document in the transaction.

Many guarantee claims are relatively straightforward. If the guarantee is properly executed and there is no genuine dispute as to liability, a lender may be able to obtain summary judgment, avoiding the need for a full trial (if bankruptcy is not suitable). This can significantly reduce the time and cost involved in recovering the debt.

Most lender-friendly documents also contain an indemnity. The distinction matters. A guarantee is generally tied to the borrower’s liability, whereas an indemnity creates a separate and independent obligation owed by the guarantor directly to the lender. If there is a problem with the underlying debt or the guarantee itself, the indemnity may provide the lender with an additional route to recovery. Put simply, a guarantee says: “if the borrower does not pay, I will“. An indemnity says: “if the lender suffers a loss because the borrower does not pay, I will make good that loss“. Sensible lenders will usually want both.

That is not to say that guarantors never defend these claims. Common arguments include allegations that the guarantee was not properly executed, that the lender failed to comply with the terms of the facility agreement, that legal advice was not taken, that the amount claimed is incorrect, or that the guarantee should not be enforced due to representations made at the time it was signed. The success of such arguments will depend on the particular facts and the wording of the relevant documents.

The key to successful recovery is often early action. Delays can increase the risk of assets being dissipated, financial positions deteriorating and enforcement options becoming more limited. Identifying the guarantor’s asset position at an early stage can help lenders determine the most effective recovery strategy and avoid pursuing remedies that are unlikely to produce a commercial return.

At Wellers, we advise lenders, finance providers and other creditors on all aspects of guarantee enforcement, from pre-action recovery strategies through to judgment and enforcement. Whether the debt is disputed or undisputed, obtaining early advice can often place lenders in the strongest possible position to maximise recovery and minimise risk. Contact us to discuss your personal guarantees and recovery options.