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How To Defend a Call on a Personal Guarantee

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A personal guarantee is an agreement between a business owner and lender, stating that individual or individuals who sign it will be responsible for paying the financial obligations of the business if the business fails to do so. They can arise in connection with any banking facility, such as bank loans, property mortgages or leases or even credit accounts with suppliers or any arrangement where one entity is given credit by another.

Demands made of the guarantor sometimes come as an unpleasant surprise either because the guarantee had been forgotten about or it had been assumed that it was no longer valid. The demand may also be for something totally unexpected. What should you do if you receive a demand under a personal guarantee?

In this article, litigation partner at Keystone Law Patrick Selley explains the first five things you should consider when assessing whether the claim is valid.

  1. Is the guarantee still valid?

The first thing to do is to check that the guarantee is valid. Guarantees need to be evidenced in writing and signed by the guarantor. There are circumstances where a signature that is not of the guarantors will still be valid as it was made with their knowledge and direction.

Like all other contracts in English law, a guarantee needs to be either signed as a deed or provided for consideration. Consideration means that something of value has to have been given in exchange for the guarantee, such as the lender agreeing to provide a loan to the business.

  1. What was agreed in the contract?

When you receive a demand for payment under a guarantee, it is important to check the contractual scope of the document you signed. This usually involves consideration of the contract of guarantee and the contract between the lender and the borrower.

For example, the guarantee may relate to a particular facility that has long since been paid. Frequently guarantees contain financial limits. The position may not be entirely clear, particularly if there have been changes to the lending facilities between the lender and the borrower. The wording of the contracts are paramount but the court will attempt to interpret the wording in accordance with business common sense and the circumstances prevailing the time you signed the guarantee.

  1. Recall the circumstances of its signing and any representations that were made

 Like any contract, if a guarantee was made in accordance with an agreement which was untrue at the time, then the guarantee will be discounted entirely.

The most usual thing that judges hear is that the guarantee was “only a formality” and would “never be called upon”. Therefore, whilst sceptical of such representations, if there is written evidence that is consistent with a misrepresentation having been made, it may be possible to have a guarantee declared invalid. Some written evidence is important particularly if you are seeking to stop a Statutory Demand that may have been served.

  1. Was there undue influence or duress?

A guarantee must be freely given and not made subject to undue influence or duress. One of the most common circumstances is where a family member, for example a spouse, gives a guarantee to the partner’s business. In these circumstances any claim against the family member on a guarantee is likely to fail unless there is a certificate of independent legal advice having been given to the family member guarantor.

However, it is often believed by guarantors that any guarantee entered into because a bank is threatening to enforce its contractual rights following a default by the borrower, that the guarantee will be disregarded as it was signed in duress. In such cases, merely threatening to enforce contractual rights does not amount to duress. In fact, what the lender is actually saying is that if a guarantee is given, it will not enforce its contractual rights. By refraining, which the lender is not obliged to do, it provides the valid consideration for the contract of guarantee.

  1. Changes to the arrangements after the guarantee has been given

A guarantee is classified as a contract of ‘suretyship’, which means that the person signing will assume liability for the obligations of another. Because the surety (guarantor) may not necessarily be directly involved in the primary relationship between the borrower (company) and the lender (bank), the law of suretyship has developed so that additional defences to guarantors in certain circumstances are permitted.

Therefore, if changes are made to the arrangements between the lender and the borrower after the date of guarantee and if the court determines that the guarantor had not in some way consented to the change then the guarantee will be discharged. Such behaviour might include increasing the amount originally agreed to be lent, releasing the borrower from its obligations or releasing co-guarantors or other security.

All properly drafted bank guarantees will exclude these sorts of remedies. However, guarantees come in many shapes and sizes and if there have been changes to the arrangements with the lender then it is worth checking this point carefully.

What next?

It is more common than ever for a guarantor to receive the unwelcome news from the bank that the guarantee is being called. If you are unsure of what is included in your guarantee or if the wording of the contract is unclear, seek legal advice to clarify your liabilities. You may be able to challenge your personal guarantee claims and potentially save any assets which are now at risk.

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