Bank Guarantees and Security Documentation

Independent Legal Advice on Personal Guarantees and Security Documentation

When undertaking some corporate transactions banks or organisations require the directors of a company (primary debtor) to obtain independent legal advice when those directors provide personal guarantees as a form of security for the lender.

There is a high risk in providing personal guarantees, simply because a director is being asked to be financially responsible for the transaction, should the company or whomever they are guaranteeing the obligations of, defaulting on their/its obligations in relation to the transaction.

Personal guarantees are commonly onerous, risky, and far ranging. Personal bankruptcy is an inherent risk when providing a personal guarantee, as the director could find themselves personally liable for the full extent of a failed transaction should the company or individual that they are guaranteeing the obligations of being unable to comply with terms of the agreement.

Liability under a Personal Guarantee

A person providing a personal guarantee will become financially liable when the primary debtor defaults on the terms of the original agreement. This means that the lender does not need to go through the Courts or exhaust other options available to them before pursuing a guarantor for a debt.

Often guarantors agree to be liable over and above the value of the loan – they could agree to be responsible for any costs and expenses that the lender incurs due to a default of the primary debtor. This means that not only could the director find themselves responsible for the debt of the primary debtor, but also the lender’s legal and other expenses incurred in relation to taking any action as a result of the failure.

By entering into the personal guarantee, the director will be confirming that they understand the risks and agree to be financially responsible under the terms of the guarantee and the security documents if the primary debtor defaults in their obligations.

How we can help you

Whether you are being asked by a lender to provide a personal guarantee on behalf of a primary debtor or to obtain independent legal advice in relation to a corporate transaction, our lawyers are available to advise you on the terms and effects of the personal guarantee and security documentation, so that you are fully aware of the risk and extent of your liability and so that you are able to make an informed decision as to whether you are prepared to provide the guarantee that is being requested.

Our advice will include explaining to you the terms and the effect of the corporate documents, but we will also suggest alternative measures which could protect your personal or your company (primary debtor) financial position, to mitigate potential risk and we will discuss other viable and potentially more commercially sensible solutions.

We take our time to consider the transaction in advance, to discuss the transaction with you, and tailor our advice to suit your particular and personal and business needs.

Our objective is to ensure you are comfortable with the transaction and are able to make an informed decision when deciding whether to provide the personal guarantee.

We offer a wide range of personal and corporate guarantee advice and services, including:
• Independent legal advice on the terms and effect of personal and corporate guarantees;
• The preparation of personal and corporate guarantees;
• Advice regarding the enforcement of, and the enforceability of personal and corporate guarantees;
• Legal advice and assistance when personal and corporate guarantees are called or are likely to be called upon, including where a company is insolvent or is likely to be insolvent.
A guarantee is a legally binding promise that if a party to a contract fails to comply with its obligations under that contract, the person giving the guarantee on behalf of the company will fulfil those obligations.
Typically, the obligations guaranteed relate to the repayment of debts. Other common examples include Banks, who often require directors of limited companies to guarantee the repayment of loans made to the company, as well as landlords, who often require directors of limited companies to guarantee the repayment of rent.
A legal charge is registered against a property. The borrower must comply with the terms of the Legal Charge and any other relevant documents. If the borrower, and the guarantor, on being called upon under a guarantee, are both unable to make repayments the lender may exercise their powers to sell the property in order to realise their money.
Alternatively, in some situations the lender may appoint a Receiver to manage the charged property such as to collect rent for the benefit of the lender, whilst charging any incurred costs and interest to the borrower and/or guarantor.
If our client is a company who is borrowing money which is being secured by way of a legal charge, the legal charge will also be registered against the company’s register at Companies House.
A debenture is a form of security given by a limited company, which is different to the legal charge.
By way of a debenture, a company charges all its property and assets (including stock, office and plant equipment, insurance policies etc) with payment, in the event that the company is not able to honour its commitments to the lender.
In the event of default by the company the lender can enforce its security. Often this will be done by appointing administrators. The lender is usually also able to claim any costs and interest incurred in taking any action relating to an event of default.
If you are a company borrowing money and granting a debenture, the debenture will be registered against the title to the company at Companies House.
An Independent Legal Advice certificate is a certificate signed by an independent solicitor (i.e. a Solicitor that is not involved with the main transaction) which confirms that the individual providing the guarantee has obtained independent legal advice as to the terms, effect and implications of the transaction and any guarantee that they are giving.
The certificate will be signed by the independent solicitor providing confirmation that the terms and implications of the guarantee have been fully explained to the individual providing the guarantee. This is intended to reduce the chances of a guarantor being able to contest a claim if the lender or creditor takes action against him to enforce payment, for example by arguing undue influence.