Can you get out of a personal guarantee?

Why personal guarantees are hard to escape

Lenders write guarantees to be difficult to get out of. Most are:

• continuing: they cover the debt as it changes over time, not just the first loan
• “all monies”: they cover everything the company owes that lender, now and in future, unless they say otherwise
• joint and several: where there are several guarantors, the lender can pursue any one of you for the whole amount

They also usually let the lender extend, increase or change the company’s borrowing without asking you again. See the risks of signing a personal guarantee.

Before you sign: negotiate the terms

Your strongest position is before you sign. Lenders don’t always agree, but it’s common to ask for:

• a cap: a maximum amount, ideally including interest and costs
• a time limit: the guarantee ends on a set date or after a period of good repayment
• a specific loan only: the guarantee covers one facility, not “all monies”
• release conditions: you’re released when the loan falls below a set level or the company hits agreed targets
• several liability: each guarantor is liable only for their own share

Your solicitor explains the terms as part of the independent legal advice your lender requires, and can point out what’s worth asking for. See ILA for a director’s personal guarantee.

After you’ve signed

Ask the lender to release you

The lender doesn’t have to agree, but it often will if its risk doesn’t increase. The usual triggers are:

• the loan is repaid or refinanced with another lender
• you sell your shares, and the buyer gives a replacement guarantee
• other security is offered instead, such as a charge over a property
• the company’s finances have improved enough that the lender no longer needs it

Get any release in writing, usually as a signed deed of release, and ask for the original guarantee back.

Give notice to end future liability

Many guarantees include a clause letting you give written notice, often one to three months, so the guarantee stops covering new borrowing. You remain liable for what the company owes when the notice ends. Giving notice can also lead the lender to review or call in the company’s facilities, so think about the knock-on effect first.

Leaving the company doesn’t end it

Resigning as a director or selling your shares doesn’t release you on its own. Unless the lender agrees, you stay liable, even for borrowing taken out after you’ve left if the guarantee is “all monies” and you haven’t given notice.

When a guarantee can be challenged

A court may refuse to enforce a guarantee in some situations, for example where:

• it wasn’t in writing and signed by you, which the law requires
• you were pressured, or misled about what you were signing, and the lender didn’t take the steps set out in the Etridge case, such as requiring independent legal advice
• the loan was changed in a way that increased your risk without your agreement, and the guarantee doesn’t allow that (most do)
• the lender didn’t follow the demand procedure the guarantee sets out

These arguments depend heavily on the facts and the wording, and they’re rarely straightforward.

If the lender has made a demand

Don’t ignore it. Most guarantees are payable “on demand”, and the lender can go to court if you don’t pay. A judgment could lead to a charging order over property you own. Take advice promptly, from a solicitor experienced in banking disputes or, if you can’t pay, an insolvency practitioner. There may be room to negotiate a reduced settlement or a payment plan.