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What is an unenforceable personal guarantee?

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How can I check if my personal guarantee is unenforceable?

Your personal guarantee may be unenforceable due to circumstances outside of your contract. This may include being misled by the creditor, if a key fact was omitted from the contract, co-guarantor issues, suspicions of fraud, or if the facility provided by the bank changed significantly since you signed the guarantee.

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What circumstances can mean a personal guarantee is unenforceable by a lender?

Personal guarantees provided for business borrowing hold you personally liable for the debt if your company is unable to repay. They can risk your home and other personal assets should your business fail, as the lender will pursue you through the courts for repayment.

If you’re facing this scenario, it’s worth considering whether the personal guarantee is actually enforceable. A personal guarantee may be rendered unenforceable for a number of reasons, and can sometimes be affected by circumstances outside of the contract.

Firstly, however, let’s look at what a personal guarantee is and what it means for you as the guarantor.

What is a personal guarantee?

Banks and other lenders typically require a personal guarantee from one or more directors that they’ll repay the loan if the company cannot. This secondary liability mitigates the lender’s risk, and provides them with an additional avenue to recover their money.

If more than one director has provided a guarantee for a loan, the lender will generally target the director who is most financially able to pay, or owns high value assets. Personal guarantees are sometimes capped so your liability may only cover part of a loan, or there may even be a time limit on your liability.

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When is a personal guarantee unenforceable?

It’s often external circumstances that affect whether a personal guarantee is enforceable, rather than the actual wording of the document. For example, the ‘limitation period’ might be a consideration.

This is the timescale allowed for legal proceedings to start with a view to recovering debt. It is six years for ‘standard’ debt recovery cases, but may be 12 years if the personal guarantee is regarded as a deed.

If a bank waits this length of time before making their claim, you may be able to argue that the time lapse alone has significantly reduced your chances of successfully defending it, for example.

But what other external circumstances might make a personal guarantee unenforceable? Here are a few potential instances:

  • You were appreciably misled by the creditor when you signed the guarantee, you signed it under duress, or fraud has taken place
  • The lender omitted to inform you of a material fact that would have affected your signing of the guarantee – you believed someone else was a co-guarantor but they weren’t, for example and you weren’t aware of this
  • Maybe the facilities provided by the bank changed significantly in the time between signing the guarantee and the creditor’s claim, and you didn’t know about these changes

Challenging a personal guarantee

It’s crucial to act quickly when challenging a personal guarantee - to provide yourself with time to consider all the facts and potential routes for a challenge, but also because once the lender takes legal action, enforcement can be a quick process.

Real Business Rescue can provide reliable professional advice if you’re facing liability through a personal guarantee. Please call one of our partner-led team to arrange a same-day meeting free-of-charge so we can quickly establish your options – we operate an extensive network of offices throughout the UK.

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